A Chinese Perspective on WTO Reform 9811982295, 9789811982293

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Lei Zhang Xiaowen Tan   Editors

A Chinese Perspective on WTO Reform

A Chinese Perspective on WTO Reform

Lei Zhang · Xiaowen Tan Editors

A Chinese Perspective on WTO Reform

Editors Lei Zhang Shanghai University of International Business and Economics Shanghai, China

Xiaowen Tan Shanghai University of International Business and Economics Shanghai, China

ISBN 978-981-19-8229-3 ISBN 978-981-19-8230-9 (eBook) https://doi.org/10.1007/978-981-19-8230-9 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Contents

The Influence of WTO Agreements on China’s FTAs . . . . . . . . . . . . . . . . . . Zhongmei Wang and Bizhou Yang

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Evolution of Sustainable Development Preservation in RTAs: Progression and Challenges for China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Haifeng Wang

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Intellectual Property Protection in Free Trade Zones: Main Issues from China’s Perspective in the International Context . . . . . . . . . . . . . . . . Hong Yang and Hongsong Song

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Divergences in WTO E-commerce Negotiations and Promotion Paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jie Yang and Huiling Lin

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Free Pass or Constructive Response? Assessing China’s WTO Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Yichou Han Empirical Evolution of the WTO Security Exceptions Clause and China’s Discourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Yong Liang and Zhijie Peng Trade Control and WTO Law: Examining the Adequacy of the GATT Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Tao Du and Ziwen Ye

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The Influence of WTO Agreements on China’s FTAs Zhongmei Wang and Bizhou Yang

Abstract All the China’s FTAs in force have been concluded after its entry into the WTO, and the obvious influence of the WTO agreements can be found in the setting of their framework, language and concrete provisions. In the past two decades, the model rules provided by the WTO, the proactive commitment to openness advocated, and the deepening political and economic links with partnership countries have all had a substantial positive impact on the development of China’s FTAs. In general, China is not the fastest among Asian countries to negotiate and conclude FTAs, but it has made a big leap in the past decade. After 2010, China began to accelerate the implementation of its Free Trade Area Strategy and planned to establish a global FTA network, which is in line with the reality that China is deeply embedded in the global production network. However, China’s FTAs in recent years have still not had the features of strategic trade policy, but have developed over the basis of the WTO rule system.

1 The Development of China’s FTAs and Its Free Trade Area Strategy 1.1 The Expansion and Deepening Trend of China’s FTAs China’s first effective modern Free Trade Agreement (FTA) was signed in 2005 with Chile, four years after China’s accession to the WTO. As of May 2022, China has concluded twenty-one FTAs (including the Mainland, Hong Kong and Macau Closer Economic Partnership and Trade Arrangement), with ten FTAs under negotiation, and 8 potential FTAs announced as under study by the Ministry of Commerce (see Table 1). In addition, China has formally applied to join the CPTPP and DEPA. Z. Wang (B) Institute of World Economy, Shanghai Institute for International Studies (SIIS), Shanghai, China e-mail: [email protected] B. Yang Institute of World Economy, Shanghai Academy of Social Sciences, Shanghai, China © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Zhang and X. Tan (eds.), A Chinese Perspective on WTO Reform, https://doi.org/10.1007/978-981-19-8230-9_1

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Table 1 List of China’s FTA partner countries and regions Asia

FTA concluded

FTA under negotiation

FTA under study

RCEP

China-Japan and South Korea

Nepal

ASEAN

GCC

ASEAN (10 + 1 upgraded)

Sri Lanka

Bangladesh

Singapore

Israel

Mongolia

Singapore upgraded

Palestine

Pakistan Pakistan Phased II Maldives Georgia South Korea

South Korea Phase II

Cambodia CEPA Oceania

New Zealand (with upgraded)

Fiji

Australia America

Peru

Peru upgraded Colombia

Chile

Panama

Canada

Chile upgraded Costa Rica Europe

Africa

Iceland

Norway

Switzerland

Moldova

Mauritius

Switzerland upgraded Papua New Guinea

Source http://fta.mofcom.gov.cn/

Although China’s FTAs practice started comparatively late, and still focuses on trade in goods and on further reduction of tariffs on the basis of WTO most-favored-nation treatment, the FTAs contribute much to promoting trade with partner countries and regions. The first to start FTA negotiations with China was ASEAN in 2002. However, it took 8 years for China to finally reach an FTA with ASEAN in 2010. Comparatively, the fastest negotiation and the earliest concluded one is the China-Chile FTA (2006). Almost all FTAs were initiated after China joined the WTO in 2001, and especially explosive growth has occurred in the past 10 years. Judging from the FTAs that have

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been reached, are being negotiated, and are being studied, in addition to the obvious intent to cover the five continents as much as possible in terms of geographical layout, the degree of commitments, the focus on trade in specific goods, and the main text and wording have varied a lot.1 It is difficult to sum up a unified and clear model and pattern of China’s FTAs in force. However, from the historical perspective, the content of China’s FTAs in recent years has expanded significantly compared to the previous period. Concluded in 2006, the FTA between China and Chile2 has only 121 articles and 14 chapters in total. Its main content focuses on tariff reduction and facilitation of trade in goods. The framework structure and written expression are close to the General Agreement on Tariffs and Trade of 1994. The two sides signed the Supplementary Agreement on Trade in Services in April 2008, which was implemented in August 2010. In September 2012, a supplementary agreement on investment was signed, which was implemented in February 2014. The upgraded version signed in 20173 consists of a preamble and 9 chapters. In addition to upgrading the rules in four areas of the original agreement—market access for trade in goods, trade facility, rules of origin and economic and technical cooperation—it also adds the regulation of customs procedures to the trade facilitation section, and adds 4 new chapters covering ecommerce, competition, environment and trade in service. The expansion and deepening of the FTAs is in line with the expansion and deepening of the trade and investment between the signatories.4 Chile is the first Latin American country to establish diplomatic relations with China, the first Latin American country to sign a bilateral agreement with China on China’s accession to the WTO, and the first Latin American country to sign a free trade agreement with China. Since 2012, China has become Chile’s largest trading partner, largest export market and fourth largest source of imports. Chile has become China’s third largest trading partner in Latin America.5 Just take Chile’s advantageous agricultural products as an example. Chile’s fruit exports to China have increased from US$67 million in 2007 to US$1.262 billion in 2016, an increase of nearly 19 times, becoming the first source of fresh fruit imports in China.6

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Qu Yue, et al., “China’s FTA Trade Partner Selection from the Perspective of Global Value Chain: Base on the Data of Trade Value Added”, Journal of Finance and Economics, Vol. 47, No. 6, June 2021, pp. 33–46. 2 Free Trade Agreement Between the Government of The People’s Republic Of China And The Government Of The Republic Of Chile, at http://fta.mofcom.gov.cn/chiletwo/xieyi/myxd_en.pdf. 3 Protocol to Amend The Free Trade Agreement And The Supplementary Agreement On Trade In Services Of The Free Trade Agreement Between The Government Of The People’s Republic Of China And The Government Of The Republic Of Chile, http://fta.mofcom.gov.cn/chiletwo/xieyi/ bcyds_en.pdf. 4 Baier Scott and Jeffrey Bergstrand, “On the Economic Determinats of Free Trade Agreements,” Journal of International Economics, Vol. 64, No. 1, 2004, pp. 29–63. 5 http://www.gov.cn/zhengce/2017-11/12/content_5239022.htm. 6 Id.

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The most notable development in China’s FTAs is the RCEP. Although FTAs have also been concluded with a few European, Latin American and African countries, China’s partner countries are still concentrated in Asia and Oceania, which are geographically close. Beyond all previous FTAs in the Asian region, the RCEP will include the three largest economies in this region—China, Japan and South Korea, especially China, a huge manufacturing base and consumption market. The integration of production in this region will bring substantial benefits.7 It is worth noting that the RCEP brings new impetus to the transferring and expansion of supply chains in the region with inclusive rules of origin and progressive integration.8 The rules of the RCEP are significantly upgraded compared to all China’s previous FTAs. The RCEP consists of 20 chapters, and the framework is essentially based on the WTO agreements, while at the same time incorporating many WTO+ contents, including e-commerce, competition, government procurement, small and mediumsized enterprises, economic and technological cooperation and other chapters. In the chapters including rules of origin, customs procedures and facilitation, trade in services, and movement of natural persons, its provisions have also been significantly improved and expanded compared with WTO rules. It can be said that the RCEP is a milestone for China towards advanced and comprensive partnership,9 although it has not fundamentally broken through the WTO’s rule framework.

1.2 China’s Free Trade Area Strategy Some Chinese scholars have pointed out that the report of the 17th National Congress of the Communist Party of China (2007) which proposed to “implement the Free Trade Area Strategy and strengthen bilateral and multilateral economic and trade cooperation”, is the first official document in which China has announced that the establishment of a free trade area network is a national strategy.10 And the Eighteenth National Congress of the Communist Party of China (2012) further proposed to accelerate the implementation of the Free Trade Area strategy.11 The Third and Fifth Plenary Sessions of the 18th Central Committee of the Communist Party of China proposed to accelerate the implementation of the Free Trade Area Strategy on the 7

See Zhang Yan, “RCEP Regional Value Chain Reconstruction and China’s Policy Choice-Based on the Construction of the ‘Belt and Road’”, Asia Pacific Economy, Issue 5, 2020, pp. 14–24. 8 For example, KPMG, “Rethinking Supply Chain: RCEP impact on the supply chain in ASEAN and beyond”, Jan. 2021, at https://assets.kpmg/content/dam/kpmg/sg/pdf/2021/01/RCEP-impacton-the-supply-chain-in-ASEAN-and-beyond.pdf; The Economist Intelligence Unit, RCEP set to strengthen Asian Supply Chains, at https://www.eiu.com/n/rcep-set-to-strengthen-asian-supply-cha ins/. 9 Liu Keke and Zhang Yan, “Four “Value-Added Points” of RCEP Trade Facilitation to Chinese Import and Export Enterprises,” China Customs, Issue 3, 2021, pp. 26–28. 10 Chen Wenjing, “An Analysis of China’s Free Trade Area Strategy and Future Development”, Frontiers of Theory, No. 17, 2008, pp. 9–12. 11 Id.

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basis of surrounding areas and to form a high-standard free trade area network facing the world.12 At the study meeting of the Political Bureau of the Central Committee of the Communist Party of China on December 5, 2014, General Secretary Xi Jinping proposed to speed up the implementation of the Free Trade Area Strategy, speed up the construction of a new open economic system, and take the initiative to open up to the outside world to gain the impetus of economic development and win international competition.13 In December 2015, the State Council issued the “Several Opinions of the State Council on Accelerating the Implementation of the Free Trade Area Strategy”,14 proposing to “gradually build a high-standard free trade area network based on the surrounding area, radiating the ‘Belt and Road’, and facing the world”. The “Several Opinions of the State Council on Accelerating the Implementation of the Free Trade Area Strategy” (hereinafter referred to as “Several Opinions”) in 2015 pointed towards, in the near future, speeding up the ongoing free trade area negotiation process, and gradually upgrading existing free trade areas when conditions are met. China will actively promote the establishment of free trade areas with most of its neighboring countries and regions, so that the proportion of China’s trade with free trade partners in its total foreign trade will reach or exceed the level of most developed countries and emerging economies; form a global free trade area network including neighboring countries and regions, covering countries along the “Belt and Road” and radiating important countries on five continents, enabling most of its foreign trade and two-way investment to achieve liberalization and facilitation. It can be seen that the “Several Opinions” is the first time that an official document has described the Free Trade Area Strategy in more detail. Through the “Several Opinions”, China has clearly declared that the Free Trade Area Strategy has two targets: one is to promte and expand the construction of free trade areas; the other is to accelerate the construction of high-level free trade areas. The former emphasizes the scope and layout from the periphery to the Belt and Road to the global network; the latter emphasizes the comprehensive liberalization and facilitation of trade in goods, trade in services, investment, and movement of natural persons, with the coherence in the rules and policies setting and administrative implementing. The Free Trade Area Strategy is believed to guide China’s FTA practices since 2016. As a result, China has since launched a number of FTA upgrading negotiations, which are based on the second target of the Free Trade Area Strategy. The implementation of the first target, with the cooperation of the Belt and Road Initiative and the construction of domestic pilot free trade zones, may take time to present a different FTA map. When China first proposed the Free Trade Area Strategy, FTA negotiations around the world were in full swing.15 Among those, the conclusion of the US-led TPP was imminent, and imposed great external pressure on China. The proposal of the Free 12

Id. http://fta.mofcom.gov.cn/article/zhengwugk/201412/19394_1.html. 14 http://www.mofcom.gov.cn/article/b/g/201601/20160101244060.shtml. 15 Baldwin Richard 1993. “A Domino Theory of Regionalism”, NBER Working Paper No. 4465. 13

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Trade Strategy and the establishment of the domestic pilot free trade zones took place almost at the same time, representing China’s determination to further open up. At that time, it was envisaged that some attempts in the domestic pilot free trade zones could be used as a reference for FTA negotiations,16 but the contents of the two are not completely connected.17 After that, the “One Belt, One Road” initiative brought greater impetus to the Free Trade Area Strategy, and the “Several Opinions” in 2015 regarded it as one of the important geographical expansions of the integrated network of trade and investment. However, as far as the current One Belt One Road practice is concerned, it is still in the stage of “investment first, projects first”, and FTAs have not yet fully followed up so far, although with many understanding memoranda and joint statements signed.18 Judging from the FTAs that China has reached, the supporting theory is still the comparative advantage and benefit of free trade. Although there are also some geopolitical considerations, China’s Free Trade Area Strategy is not equivalent to the so-called “strategy” in trade policy.19 According to the “Several Opinions”, the principle of free trade is advocated throughout. Although it is proposed to build a “high-level free trade area”, its eight major contents are still focused on “openingup” and facilitation. Therefore, China’s Free Trade Area Strategy is still not moving toward strategic trade, and therefore is in line with the WTO’s principles of abolishing general quantitative restrictions and of reciprocity. As mentioned above, China’s FTA practice started in the twenty-first century, and a more explicit Free Trade Area Strategy was put forward just in recent years. Although the “Several Opinions” outlines the basic framework of China’s Free Trade Area Strategy, it is still relatively rough, and many implementation details have not yet been clarified. Comparatively, the WTO’s influence appears to be deeper and more apparent, which is mainly reflected in all of China’s FTAs carrying through the principles of liberalization and facilitation. However, compared with the first decade of the twenty-first century, the external situation has changed a lot in the past ten years. With the global FTAs entering a new stage,20 China’s recent practice also carries many new features.

16

See “The General Plan for China (Shanghai) Pilot Free Trade Zone”, 27 September 2013, at http://www.gov.cn/zwgk/2013-09/27/content_2496147.htm. 17 The reform towards “FDI negative list” might be one of the few to target for the negotiation with U.S. on Bilateral Investment Treaty then. 18 See the data at https://www.yidaiyilu.gov.cn/info/iList.jsp?cat_id=10008. 19 James A. Brander, “Strategic Trade Policy”, NBER working paper No. 5020, February 1995, at https://www.nber.org/system/files/working_papers/w5020/w5020.pdf. 20 Ravenhill John, “Regionalism”, in John Ravenhill (ed.), Global Political Economy, Oxford: Oxford University Press, 2008, pp. 172–210.

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2 The WTO Agreements’ Influence on China’s FTAs 2.1 The Effects of the WTO Agreements and FTAs in China The effect and application of international treaties or agreements in China have not been clearly defined by law for a long time.21 The study on this issue was intensive and heated before and after China joined the WTO in 2001. However, nearly 20 years on, the debate continues and there is still no clear statement in law. Now, many comprehensive FTAs raise more doubts and controversies as including many new contents beyond traditional trade arrangements. Generally, this issue shall be analyzed and discussed in three parts: first, what is the effect of international treaties or agreements in China? Second, can international treaties or agreements be directly applied in China? Third, if they cannot be directly applied, how should they be adopted or transformed into domestic laws? Article 142 of the 1986 General Principles of the Civil Law stipulates: “If any international treaty concluded or acceded to by the People’s Republic of China contains provisions differing from those in the civil laws of the People’s Republic of China, the provisions of the international treaty shall apply, unless the provisions are ones on which the People’s Republic of China has announced reservations. International practice may be applied to matters for which neither the law of the People’s Republic of China nor any international treaty concluded or acceded to by the People’s Republic of China has any provisions.” Similar expressions are found in civil and commercial laws and regulations such as the 1982 Civil Procedure Law (Trial), the 1982 Trademark Law, the 1984 Patent Law, the 1985 Law of Succession and the 1992 Maritime Law. Nevertheless, it is still impossible to draw the conclusion that “international treaties have higher effect than domestic laws”, because such expressions are only found in some laws. The 2000 Legislation Law of China sets the formulation procedures and effect of laws, administrative regulations, local regulations, autonomous and special regulations, and ministerial rules, but does not involve international treaties or agreements. Judging from the provisions of Article 7 of the 1990 Law on the Procedure of the Conclusion of Treaties of China, only treaties and important agreements must be approved by the Standing Committee of the National People’s Congress, which is consistent with the approval procedure of “laws”. For agreements such as “After the signing of the agreements and other instruments of the nature of a treaty and which are subject to approval as prescribed by the State Council or as agreed by the contracting parties, the Ministry of Foreign Affairs or the ministries concerned under the State Council in conjunction with the Ministry of Foreign Affairs shall submit them to the State Council for approval” (Article 8), their effect shall be equivalent to “administrative regulations” in terms of procedure. For other inferior agreements 21

Liu Nanlai, “Application of International Treaties and Improvement of China’s Legal System”, in Theory and Practice of Scientific Development of Social Harmony-Building a Socialist Harmonious Society, Division of Law, Social and Political Studies, Chinese Academy of Social Sciences eds, Beijing: Social Science Academic Press, 2007, p. 278.

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such as “After the signing of the agreements for which on ratification by the Standing Committee of the National People’s Congress or approval by the State Council are not required the agreements shall be submitted by the departments concerned under the State Council to the State Council for the record, except those agreements concluded in the name of the government departments of the People’s Republic of China which are to be submitted by these departments to the Ministry of Foreign affairs for registration.”, they correspond to the rules and ordinances of ministries and commissions of the State Council with regard to the approval level.22 As in most other countries, the Administration branch leads and carries on China’s treaty or agreement negotiations. But China does not have the complex problem of the “separation of powers” as in the United States.23 In China, many administrative departments have been authorized by the Standing Committee of the National People’s Congress to start some specific agreement negotiations. With respect to the negotiation and signing of treaties and agreements in the name of the People’s Republic of China, the Ministry of Foreign Affairs, or the departments concerned under the State Council in conjunction with the Ministry of Foreign Affairs, shall make a recommendation and work out the draft treaty or agreement of the Chinese side, and submit it to the State Council for examination and decision (Article 5 of the 1990 Law on the Procedure of the Conclusion of Treaties of China). However the law itself does not require the administration to notify the legislature before or during negotiations, or even detailed report the treaty’s possible impact to the legislature. In practice, there are still many communications and discussions between them, though no public questioning or hearing. So far, there has been no case where an FTA signed by the administration has not been approved by the Standing Committee of the National People’s Congress. Which kind of agreement does the WTO agreements or an FTA belong to? According to Article 3 of the 1990 Law on the Procedure for Concluding Treaties of China, treaties and agreements shall be concluded by the State Council. Article 12 clearly stipulates that the decision to accept a multilateral treaty or agreement shall be made by the State Council. In the case of a multilateral treaty or agreement containing clauses of acceptance which is signed by the Chinese representative or not signed because no signature is necessary, the Ministry of Foreign Affairs or the department concerned under the State Council in conjunction with the Ministry of Foreign Affairs shall make recommendation after examination and submit it to the State Council for decision on acceptance. Clearly, the WTO agreements’ effect in China should be equivalent to the hierarchy of “law”, lower than the Constitution, but higher than lower-level legislation such as administrative regulations, ministerial rules and local regulations.

22

Che Pizhao, “On the Application of Treaties in China”, Law Science Magazine, Vol. 3, 2005, p. 7. 23 See Stephen P. Mulligan, “International Law and Agreements: Their Effects upon U.S. Law”, Congressional Research Service Report 7-5700, updated September 19, 2018, available at https:// fas.org/sgp/crs/misc/RL32528.pdf.

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All China’s foreign FTAs are signed by the Minister of Commerce and submitted to the State Council for approval, which are equivalent to the level of “administrative regulations” in the domestic legal system. From a legal perspective, the FTA is less effective than the WTO agreements, and should not conflict with the rules of the WTO, nor should it conflict with domestic laws. However, as for the specific commitments on market opening or trade facility, it can exceed WTO standards. It is worth asking that, although FTAs are equivalent to the level of effectiveness of “administrative regulations” in China, when domestic administrative regulations and their subordinate laws conflict with FTA, can we refer to Article 142 of the General Principles of Civil Law to apply an FTA in law enforcements and judicial proceedings? The answer is uncertain. In fact, in China’s practice, FTAs are not presumed to be directly applicable domestically.

2.2 Application of the WTO agreements and FTAs in China For the contracting states, according to the principle of “Pacta Sunt Servanda” in international law,24 “every treaty in force is binding upon the parties to it and must be performed by them in good faith.”25 However, international law operates only at the international level and not within domestic legal systems—a perspective consistent with Realism theory, which recognizes international law and domestic law as distinct and independent systems. At present, there are generally two ways for states to coordinate these two systems: one is “adoption”, that is, to directly incorporate treaties into the framework of domestic laws, also known as “direct application”, which means that treaties or agreements in force for the contracting state must be taken into account in the enforcement and administration of justice stages, and the government and courts can also directly invoke relevant clauses; and the other is “transformation”, that is, to indirectly apply treaties through legislation or amendment of domestic laws by domestic legislative procedures. China’s Constitution Law, Legislation Law and Law on the Procedure for Concluding Treaties do not stipulate whether international treaties can be directly applied at home. As mentioned above, the provisions of Article 142 of the 1986 General Principles of the Civil Law seem to affirm that international treaties can be directly applied in China and that their effect is higher than that of civil law. Some other specific civil substantive laws and procedural laws have similar provisions, and the judicial interpretation of the Supreme People’s Court has expressed 24

Article 26 of the 1969 Vienna Convention on the Law of Treaties stipulates that “Every treaty in force is binding upon the parties to it and must be performed by them in good faith”, that is, the obligation of abiding by the treaty. China is a member of the Vienna Convention. 25 From the Vienna Convention on the Law of Treaties, signed at Vienna on May 23, 1969, entered into force on January 27, 1980, art. 26, and the Vienna Convention on the Law of Treaties between States and International Organizations or between International Organizations, signed at Vienna on March 21, 1986, not yet entered into force, art. 26.

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similar opinions for the application and interpretation of some civil and commercial laws.26 The Supreme People’s Court points out in its Circular of the Supreme People’s Court on Several Issues Regarding the Trial and Enforcement of Foreign Related Civil Commercial Cases issued on April 17, 2000 that international conventions to which China accedes should be applied in priority, except for the clauses on which China has declared reservations. In judicial practice, for foreign-related civil and commercial cases, there are many precedents of directly invoking the United Nations Convention on Contracts for the International Sale of Goods,27 the Paris Convention on the Protection of Industrial Property,28 the International Convention on Civil Liability for Oil Pollution Damage29 and other treaties. However, there are still many differences in the concrete operation in practice. For example, after concluding or acceding to maritime international treaties, the implementation of treaties by the legislative authority or the Ministry of Transport (including the Maritime Safety Administration of the Ministry) in China generally falls into the following types: type 1, enact domestic laws and regulations to indirectly implement treaties; type 2, directly issue ordinance on uniform implementation of a certain international treaty (without distinguishing between international and domestic factors or between foreign and non-foreign factors); type 3, directly issue ordinances specifying direct implementation of a certain treaty in some part of China (e.g. legal relations with international factors or foreign factors) while indirectly implementing a certain treaty in another part of China (e.g. legal relations without international factors or foreign factors) by enacting domestic laws and regulations (transformed into domestic laws); type 4, implement a certain international treaty only in some parts of China and not in other parts of China without any illustrative statements.30 In fact, these different types of operation may also be conducted in combination. For example, China acceded to the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations in 1975 and 1979 respectively, which are directly applicable in the absence of corresponding provisions in domestic law. After that, China enacted the Regulations Concerning Diplomatic Privileges and Immunities and the Regulations Concerning Consular Privileges and Immunities in 1986 and 1990 respectively. Most of the provisions are consistent with the two conventions, which means that these two conventions actually “transformed” into domestic law several years later. In other cases, in order to accede to certain 26

Wang Liyu, “Application of International Treaties in China’s Domestic Law”, in Chinese Yearbook Of International Law, Beijing: Law Press, 1993, pp. 282–284. 27 Chen Zhidong and Wu Jiahua, “On the Application of the United Nations Convention on Contracts for the International Sale of Goods in China - Comments on Article 142 of General Principles of the Civil Law of the People’s Republic of China”, Law Science, Vol. 10, 2004, pp. 107–118. 28 Zhang Guangliang and Rui Songyan, “Application of TRIPS Agreement and Related International Conventions in China”, Intellectual Property, Vol. 5, 2007, pp. 55–59. 29 Ouyang Zhenyuan, “Analysis and Solution of Legal Issues in Oil Pollution Cases”, The People’s Judicature, Issue 15, 2010, pp. 49–54. 30 Wan E’xiang and Yu Xiaohan, “Analysis on the Application of International Treaties to Civil Relations Without Foreign Factors in China”, Chinese Legal Science, Vol. 5, 2018, p. 7.

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treaties, China has formulated or modified relevant laws in advance before ratifying the accession to relevant treaties. For example, China promulgated the Copyright Law in 1990, referring to the provisions of the Berne Convention and the Universal Copyright Convention, after which China acceded to the latter two treaties in 1992. From a practical point of view, direct application is still rare, and China’s application of international treaties or agreements is more often accomplished by “transformation”. For example, before and after China’s accession to the WTO, in order to meet the requirements of WTO agreements, China has carried out large-scale legislation and amendment of laws at home. “Since the end of 1999, China has begun to sort out and amend relevant laws, regulations and administrative rules and has drawn up plans for their enactment, amendment and abolishment. The National People’s Congress and its Standing Committee have amended seven laws, including the Law on Chinese-Foreign Contractual Joint Ventures, the Law on Foreign-funded Enterprises, the Law on Chinese-Foreign Equity Joint Ventures, the Customs Law, the Trademark Law, the Patent Law, and the Copyright Law, thus fulfilling China’s commitment to amend laws upon its accession to the WTO. … In addition to the National People’s Congress, the State Council also has had 30 administrative regulations formulated and amended, 12 administrative regulations abolished, 34 relevant policy documents suspended, and more than 1,000 ministerial rules and regulations amended or repealed by relevant ministries of the State Council”.31 Generally, due to the lack of uniform provisions, China’s domestic application of treaties has always been in a vague zone. The treaty is neither completely directly applicable nor subject to “transformation” as no explicit stipulation. If just from the previous practice and experience, the principle of international treaty priority has basically been established and observed in the judicial settlement of foreign-related civil and commercial disputes. However, as mentioned in the analysis of the first issue, international treaties or agreements in China are divided into several levels, some of which are only equivalent to administrative regulations and ministerial rules, which could not be self-executed apparently. Besides, it also seems to be a problem that if the domestic laws are in conflict with international agreements, especially low-level agreements in administrative enforcement and judicial proceedings, there may be too much room for discretion as to which one would be applied. The situation of the RCEP is a bit special. For China, it does not involve revisions at the legal level, but is more about implementation issues at the policy level, including immediate tarrif reduction as required by the RCEP, fulfillment of commitments to open service investment, and implementation of the rules in various areas of the agreement. According to the news released in April 2021, the Ministry of Commerce and relevant departments have sorted out 701 binding obligations involving China in the agreement. Through the efforts of various departments, 613 articles have been prepared for implementation, accounting for 87% of all obligations. Other Articles can also be prepared before the implementation of the agreement, and China 31

Hua Zhongwei, “‘WTO Entry Amendment’ Enters Final Sprint”, 5 March 2002, Beijing: China Economic Times, at http://www.people.com.cn/GB/14576/28320/31049/31050/2255654.html (last visited 15 Feb. 2020).

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can fully perform its obligations under the agreement when the agreement takes effect. However, there is no mention of the revision of laws and regulations, and it is obviously still a “transformation” model. It is worth noting that more and more FTAs not only contain a large number of commitments (such as tariffs, imports and procurement) made by both parties, but also involve the formulation or revision of domestic laws, which may impose extra pressure on domestic legal system.32 Although most of China’s FTAs are bilateral agreements, they may have multilateral influence through discriminatory preference and by requiring China to formulate and amend its domestic laws which will affect all other relevant trade partners. In short, they require a comprehensive commitment from the legislative, administrative and judicial powers of the contracting parties, however they come about just through bilateral negotiation between the administrative branches. Thus, the application of FTAs in China should still be handled more carefully.

2.3 The WTO’s Influence on China’s FTAs The influence of the WTO agreements on China’s FTAs should be considered from the following three perspectives: Firstly, China’s current FTAs in force were all signed after China’s accession to the WTO, and their framework, content and concrete articles will inevitably follow the WTO agreements text as a model33 ; secondly, as a signatory to the two Vienna Conventions,34 China adheres to the principle of “Pacta Sunt Servanda” and attaches great importance to the implementation of WTO obligations, which require timely disclosure of relevant progress on FTAs the members are negotiating; thirdly, as mentioned above, considering the effective level of the WTO and the FTAs in China’s domestic legal system, the specific rules of the FTAs should not conflict with the WTO agreement. China’s FTAs during the earlier few years have not exceeded the WTO’s settings in terms of framework and content, and are basically still supplements to multilateral mechanisms.35 China’s FTAs at this earlier stage generally had two approaches: one is to completely repeat and directly cite the relevant WTO rules; the other is to limit some higher-standard clauses to specific fields, and avoid using strict legal language, or stipulate otherwise in the form of a memorandum. At that time, China’s FTAs 32

Vinod K. Aggarwal and Simon J. Evenett, “A Fragmenting Global Economy: A Weakened WTO, Mega FTAs, and Murky Protectionism”, Swiss Political Science Review, Vol. 19. No. 4, 2013, pp. 550–557. 33 See C.A. Primo Braga and Alexander Yeats, “How Minilateral Trading Arrangements May Affect the Post-Uruguay Round World”, World Bank Working Papers WPS974, September 1992. 34 Vienna Convention on Diplomatic Relations (effective to China on 25 December 1975); Vienna Convention on Consular Relations (effective to China on 1 August 1979). 35 Liu Guanxi and Chen Taifeng: “Regional Cooperation and the Multilateral Trading System: China’s Interests and Policy Options”, Shanghai: German Adenauer Foundation, 2004, p. 32.

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hardly involved WTO+ or WTO extra content,36 which means that China neither added weight to existing WTO obligations nor sought negotiations on other issues beyond the WTO’s existing rule system. But the situation is changing. Several upgraded agreements signed in the last ten years, as well as the latest, the RCEP, have covered more and more WTO+ or WTO extra issues. Any observers would be surprised to look at the high-level commitments China has continuously made in the FTAs, such as the negative list of foreign investment, cross-border provision of services, intellectual property protection, competitive neutrality, e-commerce, even in terms of labor rights and climate cooperation. China’s new trends in FTAs could be used as a reference for its position and role played in the future follow-up negotiations in the WTO.37 Therefore, the FTAs also conversely affect and promote China’s performance in the WTO. The WTO allows the development of FTAs (Article 24 of GATT and Article 5 of GATS), and only requires members to file in a timely manner. Although the prevalence of FTAs has caused more and more worries for the WTO, at present, it might also help members to consider and accept upgrading and expansion of the WTO rule system. Taking the government procurement chapter of the RCEP as an example, it is more flexible than the WTO Government Procurement Agreement, only applicable to central government procurement entities, and mainly stipulates transparency obligations.38 The government procurement chapter of the RCEP has only 8 clauses, and there are no annexes of specific commitments, no requirements for the member states to open their procurement markets. Comparatively, the WTO Government Procurement Agreement includes a preamble and 22 clauses, covering procurement procedures, technical specifications, bidding and contract, information disclosure and transparency, appealing and review procedures, and dispute settlement procedures, which also attaches a list of bids committed by each participant. China’s current acceptance of the RCEP means that it may move towards the WTO’s Government Procurement Agreement.39 In addition, the conclusion that all the FTAs signed by China are affected by the WTO agreements, can also be verified from the reference and imitation of its text, which we will analyze further in the following parts. On the one hand, the preambles and specific articles of most FTAs directly incorporate corresponding WTO provisions, including the methods of “direct citation” and “citation plus further provisions”. On the other hand, in the parts where “WTO” does not appear directly, the influence of the WTO can also be clearly found in the consistency of wording 36

Yuan Ying: “The Third Pole of the Economy—China’s Construction of a Global Free Trade Network”, Business Week, March 2007, available at http://finance.sina.com.cn/economist/jingjigua ncha/20070309/16403393174.shtml. 37 Wang Zhongmei, “The Deep Crisis and Possible Breakthrough of the Multilateral Trading System: Also on China’s Role”, International Trade Issues, Vol. 10, 2013, pp. 167–176. 38 Hu Yuan, “Characteristics, Influence and China’s Countermeasures of the RCEP Government Procurement Chapter”, Foreign Economic and Trade Practice, Vol. 4, 2021, pp. 23–26. 39 For China’s attitude towards WTO Government Procurement Agreement, see Xiao Beigeng, “The Process of China’s Accession to the WTO Government Procurement Agreement and the Analysis of Commitment Countermeasures”, Chinese Government Procurement, Vol. 10, 2007, pp. 64–66.

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and the similarity of chapters. Especially in the upgraded FTAs China signed with its trade partners including the RCEP, although there are new WTO+ or WTO extra contents, the reference and similarity of most of the texts also clearly reflect China’s respect for and strict compliance with WTO rules. For example, the RCEP inherits the GATS framework for regulation of trade in services, that is, trade in services includes cross-border provision, cross-border consumption, commercial presence, and movement of natural persons. Especially for the commercial presence model with investment nature, the RCEP is consistent with GATS, whereas the latter regulates investment through the perspective of trade. While explicitly excluding investment rules from being applicable to commercial presence of trade in services, the RCEP also stipulates some specific investment protection clauses applying to it. In addition, for the service trade commitment form, the RCEP allows parties to make commitments in the GATS positive list mode (for example, China’s service trade commitments are in the positive list mode), and also allows parties to make commitments in the negative list mode. As a comparison, in other regional economic and trade agreements such as CPTPP, USMCA, or the European-Japan EPA, CETA, etc., the commercial presence mode in service trade is uniformly included in the investment chapter, regulated by investment rules; the liberalization commitments are all in the form of a negative list. The attitude of WTO to FTAs is still “allowing for soft constraints”,40 so FTAs and the WTO will coexist for a long time. Under the circumstance that various issues of the WTO negotiation are still at a stalemate and it is difficult to make breakthroughs,41 FTAs have become an important means for countries to promote liberalization and integration.42 So far, it must be admitted that, unlike the United States, China does not have a unified FTA mode, but judging from the FTAs China has signed with other countries in recent years, a relatively consistent basic framework and features have gradually formed, and the influence of the WTO is very prominent, as China attaches great importance to and abides by its WTO commitmentts.43 The influence is also reflected in the process of promoting its Free Trade Area Strategy, where China still regards multilateralism not regionalism as its highest criterion.

3 Analysis of China’s FTAs Directly Citing the WTO As mentioned, the link between China’s FTAs and the WTO agreements is also reflected in the FTAs’ direct reference to the WTO text and their high similarity. In 40

WTO, 2011 World Trade Report, English Version, pp. 189–191. Although the 12th WTO Ministerial Conference in June 2022 has reached a series of results, there are few substantive breakthroughs. 42 Ravenhill John, “Regionalism”, in John Ravenhill (ed.), Global Political Economy, Oxford: Oxford University Press, 2008, pp. 172–210. 43 See Yang Guohua, “Treaties must be abided by—China’s practice as a WTO member”, Administrative Management Reform, Vol. 7, 2021, pp. 30–39. 41

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this part, we try to examine the statistics on the parts of the FTAs’ text that directly refer to “WTO” or “GATT” and analyze the context in which these two keywords appear, to reflect the direct citations of WTO specific articles by China’s FTAs to a certain extent. The text of the FTAs used is from the China FTA Network of the Ministry of Commerce of the People’s Republic of China.44 For direct comparison, only the earlier version of the FTAs is considered; at the same time, we omit annexes such as tariff concession lists, product-specific rules of origin, and so on. The final FTAs for text analysis are shown in the following Table 2. Firstly, the frequency of the keywords “WTO” and “GATT” in each FTA is counted. The results are as following Table 3. We can see that all the FTAs mentioned “WTO” or “GATT” directly many times. The RCEP, which came into effect in 2022, ranks first with a total of 95 occurrences of the two keywords. The two keywords appear 20 times in the ASEAN—China FTA, which is the least among all the FTAs. In general, the FTAs signed by China so far have mentioned “WTO” and “GATT” frequently, a total of 846 times, indicating that the FTAs signed after China’s accession to the WTO are still based on the WTO and GATT. China’s attitude to abide by WTO rules has always been consistent, and even in the RCEP, which covers more issues and chapters than WTO agreements, it still shows respect for WTO rules. In addition to the occurrence frequency of the keywords, the location of the keywords in the text is also important information for judging whether the relationship between these FTAs and WTO is close. If the FTA only mentions the WTO at the beginning and the end of the text, it may indicate that it is only a format requirement or convention. If the keywords are widely distributed in the FTA text, it means that there is indeed a close connection between the FTA and the WTO trade rules. This paper draws lexical dispersion plots with the keywords “WTO” and “GATT” respectively. The horizontal axis in the plot represents the relative location in the FTA text, and the black vertical lines represent the direct mention of “WTO” or “GATT”. It can be seen that although the keywords are indeed concentrated at the beginning and the end, in general, the locations of “WTO” and “GATT” in the FTA text are very widely distributed, and the middle part of each FTA has repeatedly mentioned “WTO” and “GATT”, which fully shows that the citation of WTO trade Table 2 List of FTAs for text analysis

ASEAN–China (2005)

Chile–China (2006)

Pakistan–China (2007)

China–New Zealand (2008)

China–Singapore (2009)

Peru–China (2010)

China–Costa Rica (2011)

Iceland–China (2014)

Switzerland–China (2014)

China–Korea, Republic of (2015)

Australia–China (2015)

China–Georgia (2018)

China–Mauritius (2021)

China–Cambodia (2022)

RCEP (2022)

44

http://fta.mofcom.gov.cn/index.shtml.

16 Table 3 Frequency of “WTO” and “GATT” in the FTAs

Z. Wang and B. Yang FTA

WTO

GATT

Total

RCEP

71

24

95

China–Costa Rica

55

21

76

Peru–China

46

27

73

China–Korea, Republic of

47

24

71

China–Georgia

40

26

66

Australia–China

40

24

64

China–Mauritius

42

21

63

Switzerland–China

37

18

55

China–New Zealand

35

19

54

Iceland–China

32

17

49

China–Cambodia

29

14

43

Chile–China

26

17

43

Pakistan–China

29

11

40

China–Singapore

19

15

34

ASEAN–China Total

16

4

20

564

282

846

rules in the FTAs signed by China is not limited to be general and superficial, but is closely related to specific provisions (Fig. 1). In order to explore the context in which the FTAs mention “WTO” and “GATT”, this paper further conducts a KWIC (Keyword In Context) analysis of FTA texts. The method provides the context of the position of the keyword by retrieving the keyword in the text, to deepen the understanding of the relationship between the word and the full text. In this paper, “WTO” and “GATT” are used as keywords, and AntConc software is used to perform KWIC analysis on FTA texts. To illustrate the relationship between keywords and context more clearly, this paper removes punctuation marks and numbers in the FTAs. Due to the 846 mentions of “WTO” and “GATT” in all FTA texts, limited to the length of this paper, only 20 lines randomly selected from the analysis results are given here. It can be seen that there is an apparent location correlation between the context and the keywords, which proves that the FTAs signed by China have made a lot of references to the relevant articles of the WTO agreements (Table 4). Further, in order to explore the relationship pattern between keywords and context, this paper counts the number of occurrences of combinations composed of three consecutive words (3-g) in the KWIC analysis results. The specific results are shown in the following table (Table 5). Due to space limitations, only the top 20 combinations are given here. It can be seen that the most common 3-g in the previous text of the keyword are direct references to specific chapters in the WTO or GATT, such as “article iii of”, “article vi of”, “article xix of”, etc. The most frequent combinations in the following text of the keyword are the description of specific types of WTO trade

The Influence of WTO Agreements on China’s FTAs

Fig. 1 Lexical dispersion plots of “WTO” and “GATT”

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Table 4 KWIC analysis results for the FTAs Agreement

Pre-keyword context

Keywords

Post-keyword context

China–Costa Rica

other electronically through their respective

WTO

sps enquiry points of their

China–Costa Rica

of the agreement adopted by

WTO

tbt committee since st january

Peru–China

is a part of the

WTO

agreement gatt means the wto

Peru–China

agreement on tariffs and GATT trade

and article v of the

Australia–China

rulings and WTO recommendations of the

dispute settlement body the rulings

RCEP

the director general of the

WTO

and may be used in

China–Singapore

imposed consistently with a party’s

WTO

obligations ii fees or other

China–New Zealand

in article xx b of

GATT

and article xiv b of

Australia–China

accordance with article iii of

GATT

to this end article iii

Switzerland–China

panel under article of the WTO

understanding on rules and procedures

China–New Zealand

except in accordance with its

WTO

rights and obligations or in

China–Korea, Republic of

is a party to the

WTO

agreement notwithstanding paragraph a party

RCEP

the director general of the

WTO

to appoint the remaining panellists

Peru–China

part of the wto agreement

WTO

means the world trade organization

China–Mauritius

with article viii of the

GATT

neither party shall impose substantial

Peru–China

is a part of the

WTO

agreement subheading means the first

China–Korea, Republic of

which is part of the

WTO

agreement sps agreement means the

RCEP

in annex a to the

WTO

agreement hh wto means the

Peru–China

under article xix of the

GATT

and the safeguards agreement section

RCEP

who has served on a

WTO

panel or the wto appellate

The Influence of WTO Agreements on China’s FTAs

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Table 5 Top 20 3-g surrounding GATT/WTO references Rank

Pre-keyword context

Post-keyword context

Type

Frequency

Type

Frequency

1

article iii of

58

its interpretative notes

38

2

part of the

46

the safeguards agreement

28

3

article vi of

45

and the safeguards

27

4

of the of

43

agreement on implementation

26

5

article xix of

41

and its interpretative

26

6

the in annex

41

agreement on subsidies

25

7

in annex a

39

the agreement on

25

8

is part of

33

agreement means the

21

9

vi of the

33

the wto agreement

21

10

which is part

33

agreement on safeguards

20

11

annex a to

32

on subsidies and

20

12

a to the

31

wto agreement on

20

13

iii of the

31

and the wto

19

14

in accordance with

31

implementation of article

19

15

with article iii

31

on implementation of

19

16

the of article

30

on technical barriers

19

17

the which is

29

technical barriers to

19

18

of article vi

26

means the world

17

19

the with article

26

of article agreement

17

20

director general of

24

article agreement on

16

rules, such as “its interpretative notes”, “the safeguards agreement”, “agreement on subsidies”, etc. The above results further illustrate that the FTAs signed by China refer to WTO agreements in a very specific way, not just with general or symbolic respect.

4 Text Similarity Analysis Between China’s FTAs and the WTO: Based on the China-New Zealand Agreement and the RCEP Besides the case of directly citing the WTO agreements in China’s FTAs, some texts completely copy WTO agreements text, and some texts are highly similar to the relevant content of trade in goods and services under the WTO framework. As the scope of FTAs gradually breaks through the scope of the WTO agreements and expands to investment, e-commerce, government procurement, protection of small and medium-sized enterprises, etc., the percentage of overlapping parts with the WTO

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agreements has declined, but some corresponding chapters with large overlapping parts can still reflect the influence of that agreement. In order to analyze the stable correlation with the WTO in the changing trend of the FTAs, and also to illustrate the possible reverse impact of the new changes in the FTAs on the WTO, this part takes the RCEP and the China-New Zealand Free Trade Agreement (Upgrade) as examples to analyze the textual similarity between FTAs and WTO relevant documents. The two FTAs were signed in the past two years, and to some extent reflect China’s new policy stance on liberalization and regional integration.

4.1 Full-Text Similarity Analysis Considering that there are many chapters in the recent FTAs signed by China that are beyond the scope of WTO regulation, to accurately measure the similarity between the full text and the WTO, this paper divides the relevant regulations under the WTO framework according to policy areas and compares the text similarity with specific chapters in the FTA text. The specific WTO documents are shown in the table below (Table 6). This paper uses the Wcopyfind software to compare the text similarity between the RCEP and the China-New Zealand Free Trade Agreement (upgrade) and WTO relevant documents and takes at least 6 consecutive words as the standard for text matching. For comparison, the specific text similarity analysis results of each chapter of the RCEP and the China-New Zealand FTA (Upgrade) are as follows (Table 7). The Table 6 Policy areas and respective specific documents under the WTO framework Policy areas

Specific documents

Trade in goods

GATT (1994)

General services

GATS (1994)

Financial services

Understanding and Annexes on Financial Services (1995)

Telecoms

Telecommunications Reference Paper and Annex (1996)

Safeguards

Agreement on Safeguards (1994)

Anti-dumping

Article VI and Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (1994)

Intellectual property

Agreement on TRIPS (1994)

Procurement

Agreement on Government Procurement (1994)

TBT

Agreement on TBT (1994)

SPS

Agreement on the Application of SPS Measures (1994)

Dispute settlement

Understanding on Rules and Procedures Governing the Settlement of Disputes (Dispute Settlement Understanding) (1994)

Investment

Agreement on Trade-Related Investment Measures (TRIMs) (1994)

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Table 7 Text similarity analysis results Policy areas

RCEP Replication ratio (%)

China–New Zealand Number of words replicated

Replication ratio (%)

Number of words replicated

3

190

6

87

General services

34

2640

39

1895

Financial services

28

840

–

–

Trade in goods

Telecoms

18

850

–

–

Safeguards

12

420

21

393

Anti-dumping

13

114

–

–

Intellectual property

17

2171

1

13

Procurement TBT SPS

4

25

0

0

13

361

5

215

6

225

2

71

Dispute settlement

12

972

18

561

Investment

0

0

0

0

values in the table are the proportions of the texts in each chapter of the RCEP and the China-New Zealand FTA that completely duplicate the WTO agreements texts. Since the China-New Zealand FTA does not cover all the above policy areas, only the text similarity analysis results in some areas are given. It can be seen that for most of the selected policy areas, the RCEP and the China-New Zealand FTA have a considerable proportion of their texts completely copied from the WTO agreements, especially in “general services”. 34% of the text in the general services chapter of the RCEP is copied from the WTO, while the China—New Zealand FTA even reaches 39%. The replication ratios of “safeguard measures” and “dispute settlement” in the China-New Zealand FTA are 21% and 18%, respectively, higher than 12% and 12% of the RCEP. For the RCEP, except for the policy areas mentioned above, the replication ratio of “financial services” is 28%, second only to “general services”. In addition, the replication ratios of “telecommunication services”, “anti-dumping”, “intellectual property rights” and “technical barriers to trade” are all above 10%. It is worth noting that the replication ratios of “trade in goods”, “government procurement”, “sanitary and phytosanitary measures”, and “investment” are very low for both FTAs, and the replication ratio of “investment” is even zero. The reasons should be analyzed separately. For “trade in goods” and “sanitary and phytosanitary measures”, the WTO’s 1995 rules seem to be fundamental today, and both FTAs stipulate more detailed and further arrangements on the basis of the WTO requirements. The WTO Agreement on Trade-Related Investment Measures is very preliminary, and only regulates investment measures that may distort trade (not involving investment

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protection, promotion or dispute settlement, etc.), including local content requirements, performance requirements, etc. Investment has now become an important part of comprehensive trade agreements, so the investment chapters of both FTAs are much larger than the TRIMs. Government procurement is a very special issue for China, which will be further analyzed below.

4.2 Comparison of Chapters on Government Procurement Chapter 16 of the RCEP Agreement, with only 8 articles, is about government procurement. It mainly stipulates two matters: transparency and cooperation. This chapter of the agreement is not binding, and the only requirement for transparency is still a soft one, to emphasize that all parties should strive to achieve written and electronic disclosure of regulations and procedure requirements on government procurement.45 The shortness of this chapter also reflects the huge differences in the economic development levels of the contracting parties,46 and it is hard to achieve consensus on this sensitive issue. Despite this, it is still an important addition to China’s FTAs, which have never included disciplines on government procurement before that. Some media commented that this is a signal that China might further open the government procurement market to the outside world,47 and it may also be a step closer to the WTO government procurement agreement, but it is still a small step. Similarly, there are only 8 articles in Chapter 20 of the China-New Zealand FTA (Upgrade), and the content is basically the same as that of the RCEP, but the wording is simpler. From the text similarity analysis results of the chapter on government procurement, it can be seen that the text replication ratios of the RCEP and the China-New Zealand FTA are 4% and 0%, respectively, and the RCEP and WTO agreement on government procurement only have the exact same 25 words without any substance. The above results show that, from the perspective of text similarity, there are big differences between the RCEP, the China-New Zealand FTA and the WTO agreement on government procurement. The main difference lies in the lack of substantive 45

The chapter on government procurement of the RCEP covers 15 countries, but the content of the annex to this chapter only lists the paper or electronic methods of government procurement issued by 12 countries. This is because the RCEP stipulates that nothing in the government procurement chapter shall impose any obligations on LDC Parties related to transparency and cooperation. LDC Parties could benefit from cooperation among Parties. 46 There are 15 RCEP parties, all of which are members of the World Trade Organization (WTO). Among them, Japan, Australia, New Zealand, South Korea and Singapore are developed countries and are members of the WTO Government Procurement Agreement (GPA). Brunei, Malaysia, Vietnam, Indonesia, the Philippines, Thailand, and China are developing countries. The first three countries have participated in regional trade agreements (FTAs) that include legal-enforceability government procurement clauses, and the last four countries have participated in FTAs that do not include legal-unenforceability government procurement clauses. Laos, Cambodia, and Myanmar are neither GPA members, nor participate in other FTAs that contain legally enforceable government procurement provisions, and these three countries are least developed countries. 47 http://www.ccgp.gov.cn/gjdt/202112/t20211231_17474528.htm.

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binding rules. Most of the terms in the government procurement chapters of the two FTAs use words such as “as far as possible”, “effort” and “best effort”, which are non-enforceable terms and clearly stipulate that no dispute settlement mechanism applies. Specifically, the government procurement chapter of the China-New Zealand FTA mentions to “recognize the importance of promoting the transparency of domestic laws, regulations and procedures and to establish a framework to enhance cooperation between the Parties on government procurement matters”. The RCEP further emphasizes “developing cooperation” on this basic consensus. At the same time, both FTAs have delineated the same scope of application for this chapter: “This Chapter shall apply to the laws, regulations, and procedures of a Party regarding government procurement implemented by its central government entities, as defined or notified by that Party for the purposes of this Chapter”. The RCEP also adds an exception for the least developed member states: “Nothing in this Chapter shall require a Least Developed Country Party to undertake any obligation regarding transparency and cooperation. A Least Developed Country Party may benefit from cooperation among the Parties.” The RCEP states in the “Principles” clause that government procurement should be “in accordance with generally accepted government procurement principles as applied by that Party”, while the China-New Zealand FTA summarized the principles as five: “openness”, “transparency”, “fair competition”, “impartiality”, “good faith”. The biggest difference between the China-New Zealand FTA and the RCEP in government procurement lies in the terms of cooperation. The China-New Zealand FTA simply emphasizes the importance of international cooperation, while the RCEP proposes four specific measures, including (a) exchanging information, to the extent possible, on Parties’ laws, regulations, and procedures, and any modifications thereof; (b) providing training, technical assistance, or capacity building to Parties, and sharing information on these initiatives; (c) sharing information, where possible, on best practices, including those in relation to small and medium enterprises, including micro enterprises; and (d) sharing information, where possible, on electronic procurement systems. On the whole, although the RCEP and the China-New Zealand FTA’s provisions on government procurement are still simple and far from the WTO agreement on government procurement, they are important attempts by China to consider and accept to include the discipline on the government procurement market in the FTA negotiation. Considering that the United States, the European Union, and other countries have continuously tightened market access requirements for government procurement and set more conditions for reciprocal opening, China’s attitude on this issue has been significantly loosened in the past two years. Comparatively speaking, the RCEP’s provision is a little closer to the WTO government procurement agreement than the China-New Zealand FTA. Therefore, due to the follow-up negotiation of the RCEP, it can be expected that the government procurement rules under the RCEP will be further deepened. So it is still worthy to expect future adjustments to China’s position on the opening-up of government procurement market.

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Affected by the FTAs, the domestic reform has been advancing in recent years. The Ministry of Finance issued the “Notice on Promoting Fair Competition in Government Procurement and Optimizing the Business Environment” in May 2019, clarifying various measures to promote fair competition in the field of government procurement, optimize the business environment, and build a unified, open, competitive and orderly government procurement market system.48 In December 2020, the Ministry of Finance issued the “Government Procurement Law of the People’s Republic of China (Revised Draft for Comment)” to solicit public comments. The “Revised Draft for Comments” proposes to learn from international experience and promote the integration of the government procurement system with international common rules.49 One of the reform proposals is to adopt the model of “basic conditions + negative list”, which stipulates the qualification conditions of suppliers, facilitates suppliers’ participation in government procurement activities, and further reduces institutional transaction costs, which is seen as a new promise of possible openness.

4.3 Comparison of E-commerce Chapters Compared with the reform of government procurement, China has greater enthusiasm for the creation and coordination of rules in the field of e-commerce, which has become one of the most important elements in China’s foreign FTAs in the past two years. Since the e-commerce negotiations in the WTO are still in progress, it is not possible to compare the text of the FTA with the WTO e-commerce agreement. But observing the progress of China’s FTAs in this area may help to analyze its position in the WTO e-commerce negotiations. Considering that China has officially applied to join the CPTPP, and the regulations on cross-border data flow in the CPTPP are also considered to be still challenging rules for China at present, it is another difficult negotiation that China will face after completing the RCEP negotiations. Therefore, we choose to conduct text similarity analysis on the e-commerce chapters of the RCEP and CPTPP to determine the differences between the two. The results show that 768 words in the RCEP and CPTPP match exactly, and the text replication ratios are 26% and 28%, respectively, and these similar texts are distributed in most articles in the e-commerce chapter. The provisions in the e-commerce chapter can be divided into two categories: e-commerce facilitation and cross-border data flow, of which the facilitation part is more similar. E-commerce facilitation includes terms such as Paperless Trading, Electronic Authentication and Electronic Signature, Online Consumer Protection, Online Personal Information Protection, Unsolicited Commercial Electronic Messages, Domestic Regulatory Framework, and Cyber Security. It is believed that the RCEP has taken CPTPP as a template to establish e-commerce facilitation rules. 48 49

http://www.mofcom.gov.cn/article/b/fwzl/201912/20191202919267.shtml. http://www.gov.cn/hudong/2020-12/08/content_5567837.htm.

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The framework design and wording of the content of e-commerce facilitation in RCEP are basically based on CPTTP. The terms and conditions remain basically the same. In terms of cross-border data flow, there are big differences between the two. For example, although both the RCEP and CPTPP stipulate that “A Party shall not prevent cross-border transfer of information by electronic means where such activity is for the conduct of the business of a covered person”, the RCEP clearly mentions that “Nothing in this Article shall prevent a Party from adopting or maintaining any measure that it considers necessary for the protection of its essential security interests. Such measures shall not be disputed by other Parties.” and “The Parties affirm that the necessity behind the implementation of such legitimate public policy shall be decided by the implementing Party”, which gives greater flexibility to the implementation. The RCEP also has an exception statement similar to “Cross-border Transfer of Information by Electronic Means” in the “Location of Computing Facilities” clause. Furthermore, while both the RCEP and CPTPP have clearly stated their position on not imposing tariffs on electronic transmissions, the RCEP additionally stipulates “Each Party may adjust its practice referred to in paragraph 1 with respect to any further outcomes in the WTO Ministerial Decisions on customs duties on electronic transmissions within the framework of the Work Programme on Electronic Commerce.” That is, it still emphasizes maintaining the priority of WTO Ministerial Decisions and the possible changes in future global practice. This is different from the firm stance that “No Party shall impose customs duties on electronic transmissions, including content transmitted electronically, between a person of one Party and a person of another Party” in the CPTPP. Apart from the textual differences between the above two FTAs, the RCEP clarifies that the e-commerce chapter does not apply to the dispute settlement mechanism: “No Party shall have recourse to dispute settlement under Chapter 19 (Dispute Settlement) for any matter arising under this Chapter.” While CPTPP only excludes Malaysia and Vietnam from the applicability of the dispute settlement mechanism for some clauses, which means that the clauses in the e-commerce chapter of the RCEP are less binding than those of the CPTPP. On the basis of the above clauses, CPTPP also includes “Principles on Access to and Use of the Internet for Electronic Commerce”, “NonDiscriminatory Treatment of Digital Products”, “Internet Interconnection Charge Sharing”, “Source Code” in the e-commerce chapter clauses, which the RCEP does not address. The data flow rules of the CPTPP greatly conflict with existing Chinese laws. Article 37 of China’s “Cybersecurity Law” stipulates: “Personal information and important data collected and generated in China by critical information infrastructure operators must be stored domestically. If transfer abroad is necessary, a security assessment must be carried out and approval must be given on a case-by-case basis”. According to this, China’s cross-border data flow framework has two basic characteristics: first, the objects of regulation are divided into personal information and important data; second, based on the principle of domestic storage, a cross-border specific data flow restriction based on security assessment is implemented in practice.

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On 7 July 2022, the Cyberspace Administration of China (“CAC”) published issued the “Measures for Security Assessment of Cross-border Data Transfer” (the “Measures”), which will come into force on September 1, 2022. The Measures further specifies the requirements on security assessment and thresholds and the scope of data that is subject to the government security assessment under the Cybersecurity Law (effective from June 1, 2017), the Data Security Law (effective from September 1, 2021) and the Personal Information Protection Law (effective from November 1, 2021). The new Measures stipulates clearer provisions on the scope of application, methods and authorities for security assessment for cross-border transfer of data. It stipulates five situations that must be assessed for the application of Article 37 of the Cybersecurity Law: the cross-border transferred data is personal information or important data collected and generated by operators of critical information infrastructures; the cross-border transferred data contains important data50 ; the transfer of personal information to foreign countries by a personal information processor who handles personal information of more than one million people; the personal information of more than 100,000 people or sensitive personal information of more than 10,000 people are transferred overseas since January 1 of the previous year.; other circumstances under which security assessment for cross-border transfer of data is required as stipulated by the CAC. Clearly the scope of mandatory assessments is still very large and also covers data sharing within multinational companies. In recent years, China has intensively promulgated a number of laws and regulations related to data and the digital economy, and has also piloted the more detailed classification of data and permitting of cross-border transfer of packaged data without case-by-case approval in the Shanghai Pilot Free Trade Zone and Hainan Free Trade Harbor. It shows that decision-makers have realized that they need to face the databased globalization and find a compromised way to facilitate transnational business. In November 2021, China formally applied to join the Digital Economy Partnership Agreement (DEPA), another important move towards digital trade rules. Compared with CPTPP, DEPA’s major modules on digital rules are more flexible, but the standards are also not low. Therefore, despite the RCEP as a foundation, there are still many doubts about how China will approach the e-commerce chapter of the CPTPP and DEPA. But once China can accept the texts of the CPTPP and the DEPA, it will help push forward the negotiation of the WTO e-commerce agreement.

50

On January 13, 2022, the National Information Security Standardization Technical Committee (TC260) issued the draft Guideline for the Identification of Important Data, which tries to enumerate “important data.” However, such guideline is not final, and as a non-binding national guideline, it lacks legal effect. It may take a few years for all the central government ministries, local governments, and industry regulators in China to define their own rules for identifying important data.

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5 Conclusions China’s Free Trade Area Strategy has a special historical background: at this stage, around issues such as security, expansion of diplomatic relationship, and participation in international governance, China has many interests other than trade that need to be considered and balanced. China’s Free Trade Area Strategy proposes to go from the surrounding area to the Belt and Road and then to the global network, which already has a certain intention of competitive liberalization. However, if just looking at the content of the FTAs that have been reached, China still focuses on trade liberalization and reciprocity. The main clauses are based on free flow of goods, services and personnel, and there are fewer references to regulatory coordination and security cooperation. In addition, the access commitments given to different trading partner countries are also arbitrary, and the stratification methodology is not clear. Only from an external perspective, no definite overall consideration can be seen. However, the obvious common feature of China’s FTAs is that they are deeply influenced by the WTO agreement, including direct invocation, duplication of clauses, and highly similar provisions. It can be seen that, as promised, China pays great attention to and implements FTAs in compliance with the WTO rules, keeping the FTAs consistent with the WTO. On the other hand, it also reflects that in the past two decades of FTA practice, China has not expanded too much from the WTO’s rule framework, and has limited upgrades and innovations to the FTA text. This may be due to weak rule-making capacity, or the possible consideration of preserving more space for domestic progressive reforms. Nevertheless, China is accepting comprehensive FTAs with a large number of WTO+ and WTO-extra clauses, and these FTAs may in turn affect China’s position and strategy in the WTO reform and the next stage of negotiations. Considering that the Free Trade Area Strategy proposed by China still has great uncertainty, China in curent stage will still attach great importance to both regional integration and multilateralization, and the two may complement each other.

Evolution of Sustainable Development Preservation in RTAs: Progression and Challenges for China Haifeng Wang

Abstract In the era of regionalism, although the sustainable development-oriented provisions provided in RTAs are seen as “legal inflation”, RTAs are still regarded as a fresh impetus for incorporating sustainable development into the international trading system. As a WTO member, China has performed well, and the reconciliation of its legislation embodies the balance of sustainable development preservation and trade liberalization. As a leading Asian “hub” of regional trade integration, China has also paid much attention to adopting a sustainable development approach in trade liberalization in its FTAs and BITs. However, China faces some challenges in new trends of sustainable development preservation in certain megaregional trading arrangements. Keywords FTAs · Trade liberalization · Sustainable development

Abbreviations BITs CAI CPTPP CSPFTZ CSR DSB FDI FTAs GATS GATT IIAs IPO

Bilateral Investment Treaties The China-EU Comprehensive Agreement on Investment The Comprehensive Progressive Trans-Pacific Partnership The China (Shanghai) Pilot Free Trade Zone Corporate social responsibility Dispute Settlement Body Foreign Direct Investment Free Trade Agreements General Agreement on Trade and Service General Agreement on Tariffs and Trade International Investment Agreements Initial Public Offerings

H. Wang (B) Law Institute, Shanghai Academy of Social Sciences, Shanghai, China e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Zhang and X. Tan (eds.), A Chinese Perspective on WTO Reform, https://doi.org/10.1007/978-981-19-8230-9_2

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LDCs NGOs NPC PRC RCEP RTAs SOEs SPS TBT TISA TRIMs TRIPs TTIP WTO

H. Wang

The least developed countries Non-Governmental Organizations The National People’s Congress The People’s Republic of China Regional Comprehensive Economic Partnership Regional Trade Agreements State-owned Enterprises Agreement on the Application of Sanitary and Phytosanitary Measures Agreement on Technical Barriers to Trade Trade in Services Agreement Agreement on Trade-Related Investment Measures Agreement on Trade-Related Aspects of Intellectual Property Rights Transatlantic Trade and Investment Partnership World Trade Organization

1 The Evolution of Sustainable Development in the Regime of International Law From the concept to the principle, after nearly half a century of continuous development and evolution, sustainable development constitutes the cornerstone of the regime of international human rights law and international environmental law. The evolution of sustainable development has undergone several stages, mainly through various international organization resolutions, declarations, conventions and judicial decisions. The concept of sustainable development can be traced back to the World Nature Conservation Outline jointly published by the International Union for Conservation of Nature (IUCN), United Nations Environment Programme (UNEP) and World Wide Fund for Nature (WWF) in 1980. In 1987, the World Commission on Environment and Development (WCED) published the report “Our Common Future”. This report formally used the concept of sustainable development and is widely deemed the first attempt of the international community to incorporate sustainable development into the global development agenda. Since then, a large number of international organization documents, resolutions, declarations, conventions have been released by an increasing number of international governmental and nongovernmental organizations, emphasizing the importance of sustainable development not only in the environmental dimension but also in the social dimension. Some milestone international legal documents are as follows: The United Nations Conference on Environment and Development (UNCED) released the Rio Declaration on Environment and Development (Rio Declaration) and Agenda 21; the World Summit on Sustainable Development (WSSD) adopted the Johannesburg Declaration on Sustainable Development (Johannesburg Declaration); the International Law

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Association (ILA) adopted a resolution titled “The New Delhi Declaration of Principles of International Law Relating to Sustainable Development” (New Delhi Declaration); the third International Conference on Financing for Development (ICFD) adopted the Addis Ababa Action Agenda, which was later endorsed by the United Nations General Assembly; the United Nations General Assembly formally adopted a universal, integrated and transformative sustainable development agenda titled “Transforming Our World: The 2030 Agenda for Sustainable Development”, along with a set of 17 Sustainable Development Goals and 169 associated targets1 ; and the UNEP released “Living in Harmony with Nature: A Scientific Blueprint for Tackling Climate, Biodiversity and Pollution Crises”. The author considers that sustainable development is emphasized and highlighted again in the new concept of “a community with a shared future for humankind”. The initiative of “a community with a shared future for humankind” proposed by China quickly received a positive response from the international community and was successively reflected in UN resolutions and documents, including the resolution “Social Dimensions of New Partnership for Africa’s Development (NEPAD)” adopted at the 55th session of the United Nations Commission for Social Development in February 2017 and two resolutions on “economic, social and cultural rights” and “the right to food” adopted by the UN Human Rights Council at its 34th session in March 2017. The initiative of “building a community with a shared future for humankind” has been included in many UN resolutions at different levels, indicating that it has become the mainstream discourse of international recognition and has won wide understanding and support. It is of great significance in enriching global human rights governance, opening a new path for global human rights governance, and making human rights governance more just and equitable. From all the international legal documents, the following conclusions can be drawn. First, sustainable development has become an unavoidable paradigm underpinning almost all human actions and pervading environmental, social, political, economic, and cultural discourses from the local through the global level in both the public and private sectors.2 Second, sustainable development constitutes one of the customary laws in the regime of international environmental law and international labor law. The preservation of sustainable development has become a principle in the conclusion and execution of international environmental treaties and international labor treaties. Third, a legal principle of sustainable development has not yet been formed in the field of international economic law; however, the initiative of sustainable development preservation is available as an approach to balance economic, environmental and social interests. Therefore, the preservation of sustainable development has been substantialized as an obligation in international trade and investment agreements, and 1

Manjiao Chi, “Sustainable Development Provisions in Investment Treaties”, United Nations Economic and Social Commission for Asia and the Pacific, 2018, pp. 4–11. 2 V. Barral: Sustainable Development in International Law: Nature and Operation of an Evolutive Legal Norm, European Journal of International Law, 2012.23 (2).

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sustainable development-oriented (SD-oriented) provisions have been stipulated in FTAs and IIAs.

2 The Regulation of Sustainable Development Preservation by the WTO Compared with the GATT, the WTO has made much progress in the preservation of sustainable development. The objectives of standards of living, full employment, environmental protection, and preservation of sustainable development are stated clearly in its preamble.

2.1 SD-Oriented Provisions in the WTO Framework In addition to the objectives in the preamble, some typical SD-oriented provisions and agreements are inherited or developed from the GATT as follows. Article XX on General Exceptions lays out a number of specific instances in which WTO members may be exempted from GATT rules. Four exceptions are of particular relevance to environmental and human health protection: GATT article XX(a) and (b) allows WTO members to justify GATT-inconsistent measures if they are “necessary” to protect “human morals” or “human, animal or plant life or health”; and GATT article XX (e) and (g) allows WTO members to justify GATT-inconsistent measures if they are “relating to” “the products of prison labor” or “the conservation of exhaustible natural resources”. Exceptions to the application of GATS are purposed to protect public morals as well as human, animal and plant life and to protect certain aspects of individual privacy, which could be seen as being linked to the need to promote and protect human rights in the liberalization process. In contrast to article XX, considered to be an environmental and human health protection exception clause, TBT and SPS are agreements that seek to ensure that requirements that products must meet for environmental and human health purposes do not create unnecessary obstacles to international trade. Environmental and human health protection are fundamental principles for trade liberalization. Regarding human rights protection, TRIMs is considered to be an agreement that balances the rights of host members and foreign investors. Although TRIMs seems to apply to imported or exported products, it is in fact intended to protect foreign investors’ rights and substantially provides national treatment for foreign investors in host members. Article 2 regulates members’ rights and stipulates that members shall provide national treatment of imported products and prohibit quantitative restrictions on imports or exports, and article 3 provides that members have the right of exception from their obligations under TRIMs, as was prescribed under the GATT 1994.

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Protection of intellectual property rights may cause problems related to the right to health and the right to life. Protection of intellectual property rights is a major principle of TRIPs. To protect the right to health and life, compulsory licensing and parallel importing are clearly allowed under the TRIPs, particularly in national emergencies.

2.2 WTO Dispute Settlement Catering to Sustainable Development Objectives Unlike the GATT, the WTO values the opinions of NGOs in its dispute settlement proceedings. A survey of WTO dispute settlement practices reveals that a majority of NGO opinions are focused on noneconomic values, such as environmental protection and human health. The participation of NGOs in the role of “friend of the court” in the WTO dispute settlement system helps the WTO balance the values of trade liberalization and human rights protection in its dispute settlement proceedings.

Minimum or less disadvantage Measure

Balancing Trade liberalization

Interests pursued

Public policy objectives

Causal relationship

Application of the principle of proportionality in WTO jurisprudence is regarded as a tool to balance the value of trade liberalization and noneconomic values, such as human rights protection. In WTO jurisprudence related to qualification for a lawful exception under article XX of the GATT, such as EC-Asbestos, US-Gasoline, Thailand-Cigarettes, and Korea-Beef, the WTO dispute settlement body (DSB) applied the principle of proportionality to fully assess a measure under article XX. Both the EC-Asbestos case and the EC-Hormones case reveal that, in interpreting the provisions of the GATT and SPS agreement, the WTO dispute settlement body granted a high level of deference to domestic public health regulations when applied in a nondiscriminatory manner and with the good faith purpose of protecting human health and life.

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3 Evolution of Normalization of Sustainable Development in FTAs and IIAs Efforts to strengthen sustainable development preservation in WTO have encountered difficulties because of the complexity of the negotiation procedure. Regional economic bodies have easily raised human rights matters3 and other sustainable development issues. For example, NAFTA created a Labor Commission to monitor the national enforcement of labor laws, and the EU made respect for human rights a condition of membership via the Treaty of Amsterdam. If the cornerstone of a manifestly successful multilateral regime is nondiscrimination, RTAs could be considered a discriminatory tool to divert resources from multilateral trade liberalization. In spite of academic arguments over whether regional economic integration is a building block or a stumbling stone of a multilateral trade system, countries continue to build “hub-and-spoke” systems in accordance with their own strategy in the international community, which has resulted in an increasing “spaghetti-bowl phenomenon”. In this process, regional integration agreements have become the spur for adopting sustainable development approaches to trade liberalization. Scholars who have examined SD-oriented provisions in RTAs agree that these provisions are intended to improve governance and advance the preservation of sustainable development.

3.1 The Phase Before the Remultilateralized Trading System With the increase in RTAs, the proliferation of SD-oriented provisions has become a wider trend and signals the new reality of international trade. RTAs are regarded as a fresh impetus to incorporate sustainable development preservation into the international trading system. Human rights protection provisions are an example. The following table shows differences in human right standards between some preferential trade agreements.

3

Dinah Shelton, Protecting Human Rights in a Globalized World, http://www.bc.edu, 2014-04-04.

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Human Rights in Preferential Trade Agreements: Comparing EFTA, EU, U.S., and Canada Country/Rights EFTA Strategy

Which rights?

How enforced?

Any challenge?

EU

US

Canada

Specific human rights

Specific human rights

Labor rights, transparency, due process, political participation, and privacy rights

Transparency, due process, political participation, access to affordable medicines, and labor rights

Transparency, due process, political participation, labor rights, privacy rights, cultural and indigenous rights

Human rights violations lead to dialogue and possible suspension, depending on nature of violation

In newest agreements, labor rights can be disputed under dispute settlement body affiliated with the agreement. Process begins with bilateral dialogue to resolve issues

Only labor rights (monetary penalties). Use dialogue first

Universal human Universal human rights rights and specific rights

No enforcement

First challenge: Guatemala Review of Jordan

Source Susan Ariel Aaronson and Jean Pierre Chauffeur, The Wedding of Trade and Human Rights: Marriage of Convenience or Permanent Match? www.wto.org. 2014-04-08

Based on the table above, we can summarize the characteristics of human rights provisions in RTAs as follows. Human rights embedded in RTAs are much broader than what is implied in the WTO, including labor standards, democratic rights, access to affordable medicines, right to cultural participation, freedom of movement, indigenous rights, privacy rights, political participation, due process, and access to information provisions. The legal effect of human rights provisions in RTAs is weak. First, human rights protection is regarded as a means of exporting governance. The main demandeurs of human rights language in PTAs are still the developed countries, including the U.S., Canada, the EU and the members of EFTA. Developed countries introducing human rights provisions in RTAs aim at governance coherence by using trade agreements to impose their values and norms with a view to globalizing their social policies or regulatory approach because they understand that economic integration will not be successful without a strong focus on improving governance among trade partners.

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However, developing countries accept such provisions in consideration of national security and diplomacy. Second, the link between human rights protection and RTAs is ineffective. Because of different motives for participation in RTAs, developed countries and developing countries find it difficult to reach a consensus on definite and effective human rights provisions, whatever their form or legal obligation. Therefore, RTAs have adopted various strategies for embedding human rights provisions, including nonderogation clauses, language in the preamble, or language extending article XX of the GATT/WTO. Some of these provisions are binding; others are rhetorical. Third, the EU and the U.S. have used their RTAs as a mechanism for coordinating the impact of trade arrangements with the protection of human rights in their numerous spokes. These EU and U.S. RTAs are often criticized as politically and economically asymmetrical and thus lead to an increasing wealth gap between the developed and developing countries, and human rights-related conditionality of these RTAs has been criticized both as a harsh and inefficient means of promoting the human rights agenda and as a disguised barrier to trade. Because of the different understandings of the relationship between human rights and trade liberalization, even the developed countries focus on different human rights in RTAs negotiation. For example, the EU and EFTA focus on human rights under the Universal Declaration of Human Rights and rely on aspirational language and dialogue, whereas Canada and the U.S., although they remain distinct, focus on specific human rights and put these provisions into the body of trade agreements, often making them binding.

3.2 New Trends in the Remultilateralized Trading System In the era of new regionalism, RTAs have increasingly been concluded between countries that do not belong to the same geographical region. There is an argument that the MTS is facing remultilateralization. Four RTAs are widely regarded as remultilateralizing the trading system: the Comprehensive Progressive Trans-Pacific Partnership (CPTPP), Transatlantic Trade and Investment Partnership (TTIP), Trade in Services Agreement (TISA), and Regional Comprehensive Economic Partnership (RCEP). These four agreements appear to present a new type of challenge to the multilateral trading system. All four involve major components of the world economy, and all venture into territory not as yet touched by the WTO. Compared with the traditional trade system, newly negotiated and concluded FTAs and IIAs to varying degrees address “new” issues, and regulatory convergence emphasizes coordinating measures “behind the border”,4 including the sustainable development objective, environmental protection, and labor standards.

4

Is the Global Trading System at a Tipping Point? http://www.fungglobalinstitute.org, 2014-3-18.

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The objective of sustainable development in IIAs has been normalized and could be classified into eight different forms: 1. General terms of sustainable development, which are usually stated in the preamble, mainly summarized as issues related to sustainable development and not involving specific elements, such as environmental protection. 2. Anticorruption clauses, acting as an important part of public policy and a core element of good governance at the international and domestic levels and playing an important role in preventing and combating corruption, promoting equity and justice, and building effective, accountable and inclusive institutions. 3. Environmental provisions, which are the most common form of the preservation of sustainable development in modern international investment agreements. The definition of “environment” includes not only the natural environment and natural resources but also human, animal and plant life or health, clearly reflecting the concept of the sustainable development of specific elements of the environmental and social dimensions. 4. Labor rights and human rights clauses. The scope of such clauses varies with the purpose of investment agreements. Generally speaking, such clauses include not only core labor rights recognized by the International Labor Organization but also a series of other social rights related to human rights, such as gender equality and poverty eradication. 5. Substantial transparency clauses, requiring host countries to disclose laws, regulations, policies and practices related to investment and sometimes regulating how these laws and policies are formulated, which reflects the social dimension of sustainable development. 6. Procedural transparency clauses, mainly aiming to ensure the openness and transparency of investment dispute settlement procedures and specifying a series of procedural matters, such as the disclosure of arbitration documents and public participation in arbitration proceedings. 7. National security clauses, mainly addressing the basic security interests of the host countries. Because national security is widely regarded as part of the national public interest and is closely related to the prosperity of countries, it also plays an important role in the realization of the sustainable development of a country. 8. Corporate social responsibility or responsible business conduct clauses aimed at investors, as investors (especially multinational companies) usually play a key role in cross-border investment activities and are key stakeholders in the global investment governance system. The core elements of CSR, such as human rights and environmental protection, directly reflect the environmental and social dimensions of sustainable development.5 By researching the practice of concluding investment agreements in various countries, we find that sustainable development objective statements in preambles, with language that ranges from “recognizing” and “desiring to” to “promotion” and 5

Manjiao Chi, “Sustainable Development Provisions in Investment Treaties”, United Nations Economic and Social Commission for Asia and the Pacific, 2018, pp. 16–21.

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“determined”, indicate that countries are attaching increasing importance to sustainable development. Although the definition of “sustainable development” varies in different countries, it basically includes environmental protection and labor rights. Normalization of the objective of sustainable development has increasingly been embodied in provisions such as articles covering corporate social responsibility, environmental protection, labor rights, and anticorruption issues, which can be divided into the following three kinds. The first kind is articles regulating positive rights, which means members are entitled to make certain derogations from other treaty obligations on the basis of environmental concerns, labor rights and other sustainable development elements.6 The second kind is articles regulating negative rights, which means members shall not seek economic development at the expense of environmental and labor rights.7 The third kind is articles regulating positive obligations, which means members have treaty obligations to attain the objective of sustainable development by imposing it on host countries or investors.8 However, by reviewing the BITs concluded after 2019, we found that the development of sustainable development is still in the initial stage because most BITs have adopted provisions of negative rights, while provisions of positive rights and positive obligations are relatively less accepted. For example, in the Brazil-United Arab Emirates BIT (2019), article 17(1) states, “Nothing in this Agreement shall be construed to prevent a Party from adopting, maintaining or enforcing any measure it deems appropriate to ensure that investment activity in its territory is undertaken in a manner according to labor, environmental and health legislation of that Party, provided that this measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction between investors.” Such a provision is considered to be an article of positive obligations. We also found that corporate social responsibility content is receiving increasing attention in BITs since 2019.

6

E.g., Brazil-United Arab Emirates BIT (2019), Article 17(1): “Nothing in this Agreement shall be construed to prevent a Party from adopting, maintaining or enforcing any measure it deems appropriate to ensure that investment activity in its territory is undertaken in a manner according to labor, environmental and health legislation of that Party, provided that this measure is not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination or a disguised restriction between investors.” 7 E.g., Georgia-Japan BIT (2021), Article 20: “Each Contracting Party recognizes that it is inappropriate to encourage investment by investors of the other Contracting Party and of a non-Contracting Party by relaxing its health, safety or environmental measures, or by lowering its labor standards. To this effect, each Contracting Party should not waive or otherwise derogate from such measures or standards as an encouragement for the establishment, acquisition or expansion of investments in its Territory by investors of the other Contracting Party and of a non-Contracting Party.” 8 India-Kyrgyzstan (2019), Article 12: “Investors and their enterprises operating within its territory of each Party shall endeavor to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies, such as statements of principle that have been endorsed or are supported by the Parties. These principles may address issues such as labor, the environment, human rights, community relations and anti-corruption.”

Evolution of Sustainable Development Preservation in RTAs … Preamble

Provisions of positive regulation rights

Georgia- Japan BIT (2021) Israel-United Arab Emirates BIT (2021) Hungary-Kyrgyzstan BIT (2020) Brazil-India BIT (2020) Japan-Cote d’Ivoire BIT (2020) Japan-Morocco BIT (2020) Myanmar-Singapore BIT (2020) India-Kyrgyzstan BIT (2019) South Korea-Uzbekistan BIT (2019) Burkina Faso-Turkey BIT (2019) Australia-Hungary BIT (2019) Cape Verde-Hungary BIT (2019) Brazil-United Arab Emirates BIT (2019) Belarus-Hungary BIT (2019)

Provisions of negative regulation rights

39 Provisions of positive obligations (including corporate social responsibility)

Article 20 Article14.1 √

Article14.2 Article 2

Article22.1 √

Article 22.2

Article 12

Article 20

√

Article 20

√ √

Article 12

√

√

Article 5.1

Article 5.4

√ √

Article 2 Article 17.1

Article 17.2

√

Source Quoted from Research of Zhao Jiao and Zhao Qian

After researching the IIAs, let us take the example of the CPTPP to determine the trend and normalization of sustainable development in a new generation of international trade agreements. The features of complexity of “behind the border” integration and required domestic reforms including but not limited to sustainable development laws and regulations make the CPTPP a landmark 21st-century trade agreement and enhance the competitiveness of CPTPP countries in the global economy. A multitude of sustainable development issues arise in the CPTPP framework. Compared with the WTO, the CPTPP includes more sustainable development issues in its framework and provides stronger preservation of sustainable development, including issues related to the environment, labor, and intellectual property.

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For example, compared with TRIMs and GATS in the WTO framework, services and investment packages in the CPTPP cover all service sectors and provide more substantive protective measures for human rights. In particular, the CTPP provides protections for foreign investors and foreign investment, aiming to promote a competitive business environment, protect consumers, and ensure a level playing field for CPTPP companies, whether they are SOEs or foreign enterprises or large, medium-sized or small enterprises. In contrast to the “positive list” model adopted in the WTO, the CPTPP countries agree upon a national treatment and “negative list” model for foreign investment, which presumes comprehensive coverage but allows countries to negotiate specific exceptions to commitments in specific service sectors. In addition to the comprehensive market access commitment, services and investment packages provide more substantive protections for foreign investors. For example, the investment text provides substantive legal protections for the investors and investments of each CPTPP country in the other CPTPP countries, including ongoing negotiations on provisions to ensure nondiscrimination, a minimum standard of treatment, rules on expropriation, and prohibitions on specified performance requirements that distort trade and investment. The investment text includes provisions for expeditious, fair, and transparent investor-state dispute settlement subject to appropriate safeguards, with continuing discussions on scope and coverage. The investment text protects the rights of the CPTPP countries to regulate in the public interest. Another example is the competition text, which includes commitments on the establishment and maintenance of competition laws and authorities, procedural fairness in competition law enforcement, transparency, consumer protection, private rights of action and technical cooperation. Much progress has been made in protecting human rights, the environment, etc., and we confirmed that the chapters provide more regulations and measures for preserving sustainable development directly in the CPTPP. However, it has been said that one of the most unsuccessful topics related to human rights protection in the CPTPP is the lack of access to life-saving medical care due to the intellectual property provisions.9

4 China’s Practices Under the WTO and FTAs China’s constant goals are the elimination of poverty, full enjoyment of human rights by everyone and building a prosperous, strong, democratic, culturally advanced and harmonious modern socialist country. Its basic stand on sustainable development is prioritizing people’s rights to subsistence and development, making development the principal task and promoting citizens’ political, economic, social and cultural rights to achieve their all-around development.

9

Jared Genser, TPP must safeguard human rights, http://thediplomat.com, 2014-4-16.

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4.1 China’s Performance Under the WTO China has performance well in accordance with its commitments to the WTO.10 Since entering the WTO, China has carried out a comprehensive and large-scale revision and reorganization. Central government departments have cleaned up and revised more than 2300 items of laws, regulations and department rules. Local governments have cleaned up more than 190,000 local rules, government regulations and other policy measures. Through this clean-up and revision work, China has successfully fulfilled its promise and accepted the basic principles of the WTO. The reconciliation of China’s legislation embodies the balance of sustainable development and trade liberalization in the aspects of progressive national treatment of FDI, respecting and safeguarding the rights and interests of working people, optimizing intellectual property protection, and sustainable development of resource conservation and environmental protection. China has long supplied 90% of rare earth products and 80% of tungsten products to the international market, although it has only 23% of the world’s rare earth reserves and 47% of the tungsten reserves. Because of low-technology methods and overexploitation, not only are the prices of rare earth products low, but also the environment has been damaged. When China investigated this problem and found a way to solve it, the U.S., Japan and the EU were not satisfied with the restriction measures on exports and sued China in the WTO. On 13 March 2012, the United States requested consultations with China with respect to China’s restrictions on the export of various forms of rare earths and other products. On 12 September 2012, the United States, the European Union and Japan requested that the director-general compose the panel. On 24 September 2012, the director-general composed the panel. On 26 March 2014, the panel report was circulated to members. This dispute concerns Chinese export restrictions on rare earths and other products: first, it imposes duties (taxes) on the export of various forms of those materials; second, it imposes an export quota on the amount of those materials that can be exported in a given period; and third, it imposes certain limitations on the enterprises permitted to export the materials. China sought to justify its restrictions on the basis of the “General Exceptions” provision in article XX (b), (g) of the GATT, and argued that the export duties are necessary to protect human, animal and plant life and health from the pollution caused by mining these products and that the export quotas and trading rights restrictions are related to the conservation of an exhaustible natural resource. The complainants disagreed, arguing that the restrictions are designed to provide Chinese industries that produce downstream goods with protected access to the subject materials. Regarding the relationship between export duties and article XX(b), the suitability and necessity of the export duties in question were all opposed by the panel. The majority of the panel agreed with the complainants and found that the “General Exceptions” do not justify a breach of the obligation to eliminate export duties 10

WTO Chief:China got A+ performance since entry, China Daily, 2011-10-19.

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contained in China’s Accession Protocol. Additionally, all of the panelists agreed that even if article XX(b) justified China’s export duties, those duties were not “necessary to protect human, animal, or plant life or health”, as required under article XX(b). Under the circumstances, China’s imposition of the export duties in question was found to be inconsistent with its WTO obligations. Regarding the relationship between export quotas, trading rights restrictions and article XX(g), the panel agreed with China that it could rely on the article XX exceptions to justify the measures in question and that every WTO member can take its own sustainable development needs and objectives into account when designing a conservation policy, in accordance with the general international law principle of sovereignty over natural resources reflected in various United Nations and other international instruments. However, the panel stated that the measures in question did not relate to the conservation of an exhaustible natural resource because it found that the measures were designed to achieve industrial policy goals rather than conservation and that the challenged measures did not work together with measures restricting domestic Chinese use of rare earths, tungsten, and molybdenum, as required by the second part of article XX(g), despite the various domestic measures that China claimed to have imposed to restrict domestic access to rare earths, tungsten, and molybdenum. Under the circumstances, the requirements of measure purposes and “even-handedness” under GATT XX(g) were not satisfied by the measures in question; hence, the panel concluded that China’s export quotas and trading rights restrictions breached its WTO obligations.11 My views on the case are as follows: First, human rights protection is just an exception and not a principle in the WTO regime. Second, because the WTO is dominated by the developed countries and is an outcome of the legal culture of Western countries, China has difficulty in understanding the WTO provisions and balancing the relationships between the WTO text and the Accession Protocol. Third, the panel did not understand China either. Because of low governance capacity, taxation, quotas and trading rights restrictions are the usual tools used by the Chinese government to regulate the market. In controlling rare earth exploitation, the Chinese government tried to apply these measures in a nondiscriminatory manner and with the good faith purpose of protecting human health and life. Although it presented plenty of proof of these aims, the panel still refused to accept them. Fourth, the application of the principle of proportionality could be easily abused in a case ruling.

11

China—Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, http:// www.wto.org/english/tratop_e/dispu_e/cases_e/ds431_e.htm, 2014-05-02.

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4.2 Overview of Sustainable Development Preservation in China’s FTAs China, currently the world’s second-largest economy, has become a leading Asian “hub” of regional trade integration despite having joined the RTA movement later than any other major economic powerhouse.12 With the signing of the China-ASEAN FTA in 2004, China began an accelerated course of establishing FTAs. Currently, 21 FTAs have been ratified, 10 are under negotiation and 8 are under consideration in China.13 In most cases, China’s FTA talks are motivated by economic considerations,14 and the focus of these FTAs is on economic development, such as providing a modest institutional infrastructure, lowering tariffs for manufactured goods, and ensuring standard protection for foreign investment. As its participation in the globalization has developed, China has paid more attention to adopting sustainable development approaches to trade liberalization in the FTAs that it has concluded or negotiated with other countries (see the table below). Sustainable development preservation is highlighted as one of the objectives or foundations in the preambles of RTAs, for example, standard of living, job opportunities, sustainable development in a manner consistent with environmental protection and conservation, and public welfare. Although some clauses are nonbinding memoranda of understanding, both parties still have an obligation to cooperate to promote the sustainable development standards. For example, the FTAs with Chile and Costa Rica have memoranda of understanding on environmental standards, and the China-Peru FTA has a memorandum of understanding in labor cooperation.15 Clauses of sustainable development preservation are legally binding and more specific in some FTAs. For example, the FTA between New Zealand and China entered into force on 1 October 2008. New Zealand was the first developed country to conclude an FTA with China, and the China-New Zealand FTA set an example for China’s following FTAs. In the context of the FTA, China and New Zealand concluded a legally binding intergovernmental memorandum of understanding (MOU) on labor cooperation and a legally binding intergovernmental environmental cooperation agreement (ECA). The MOU and ECA are the first legally binding intergovernmental instruments on labor and the environment that China has concluded in the context 12

See Ljiljana Biukovic: Is there policy space for human rights linkages in China’s trade and investment network? edited by Daniel Drache and Lesley A. Jacobs, Linking Global Trade and Human Rights: New Policy Space in Hard Economic Times, Cambridge University Press 2014. 13 http://fta.mofcom.gov.cn/topic/enpacific.shtml, 2022-05-16. 14 See Stephen Hoadley and Jian Yang, China’s Cross-Regional FTA Initiatives: Towards Comprehensive National Power, Pacific Affairs, Vol. 80, No. 2, East Asian Cross-Regionalism (Summer, 2007), pp. 327–348. 15 See Ljiljana Biukovic: Is there policy space for human rights linkages in China’s trade and investment network? edited by Daniel Drache and Lesley A. Jacobs, Linking Global Trade and Human Rights: New Policy Space in Hard Economic Times, Cambridge University Press 2014.

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of a free trade agreement. These instruments are consistent with the government’s frameworks on integrating labor and environmental standards into trade agreements. Together, the FTA and these associated instruments will help to mutually reinforce the objectives of raising working standards and improving environmental protection in both countries. The MOU and ECA have broadly similar structures and provisions for the labor and environmental outcomes negotiated with Thailand and with Brunei Darussalam, Chile and Singapore under the Trans-Pacific Strategic Economic Partnership (P4) Agreement.16 In addition to the labor and environmental protection widely adopted in FTAs, some high standards of sustainable development preservation, such as the development of SMEs, intellectual property, public health, and cultural cooperation, are recognized in some FTAs. For example, in the China-Chile FTA, article 111 lays out the protection of “intellectual property rights”. China’s FTAs and Sustainable Development Preservation FTAs

Preamble

China-ASEAN FTA (including upgrade)

China-Chile FTA (including upgrade)

Standard of living, job opportunities, sustainable development in a manner consistent with environmental protection and conservation, public welfare

Relevant Chapters

Some Articles

Trade in Services, Investment, Economic and Technical Cooperation

Exceptions of public morals, human, animal or plant life or health in investment and trade in service; exception of public interests for expropriation, economic cooperation activities in intellectual property rights, small and medium enterprises and the environment

SPS measures, TBT, Transparency, Cooperation, Competition, Electronic Commerce

Labor, social security and environmental cooperation, small and medium-sized enterprises, cultural cooperation, intellectual property rights, online consumer protection, online personal data protection (continued)

16

New Zealand—China Free Trade Agreement: National Interest Analysis, http://www.chinafta. govt.nz/1-The-agreement/3-Publications/National-interest-analysis.pdf.

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(continued) FTAs

Preamble

China-Pakistan FTA (including second phase)

Standard of living, job SPS measures, TBT, opportunities, Transparency, sustainable Investments development in a manner consistent with environmental protection and conservation, public welfare

Exception of public interests for expropriation

China-New Zealand FTA (including upgrade)

Intellectual property rights, public welfare, sustainable development, economic and social benefits, opportunities for employment, living standards

SPS measures, TBT, Trade in Services, Movement of Natural Persons, Intellectual Property, Transparency, Cooperation, Competition, Electronic Commerce, Environment and Trade

Small and medium-sized enterprises, labor and environmental cooperation, exception of public purpose for expropriation, online consumer protection, personal data protection

SPS measures, TBT, Trade in Services, Movement of Natural Persons, Investment, Economic Cooperation, Electronic Commerce, Competition, Environment and Trade, Exceptions

Environmental protection, resource and energy conservation, online consumer protection, personal data protection, exception of public purpose for expropriation, exceptions of public morals, human, animal or plant life or health in investment and trade in services

SPS measures, TBT, Trade in Services, Temporary Entry for Business Persons, Investment, Intellectual Property Rights, Cooperation, Transparency

Small and medium-sized enterprises, cultural cooperation, competition policy, traditional medicine cooperation, labor cooperation, cooperation on forestry matters and environmental protection, exception of public interests for expropriation

China-Singapore FTA Economic and social benefits and living (including update) standards

China-Peru FTA

Standard of living, employment opportunities, reducing poverty and promoting sustainable development in a manner consistent with environmental protection and conservation, public welfare

Relevant Chapters

Some Articles

(continued)

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(continued) FTAs

Preamble

Relevant Chapters

Some Articles

China-Costa Rica FTA

Standards of living, job opportunities, sustainable development, economic and social benefits

SPS measures, TBT, Investment, Trade in Services and Temporary Entry of Business Persons, Intellectual Property, Transparency, Cooperation, Promotion and Enhancement of Trade Relations

Intellectual property and public health, small and medium enterprises, competition

China-Switzerland FTA

Standard of living, job opportunity, sustainable development in a manner consistent with environmental protection and conservation

TBT, SPS measures, Trade in Services, Investment Promotion, Competition, Protection of Intellectual Property Rights, Environmental Issues, Economic and Technical Cooperation, Customs Procedures and Trade Facilitation

Exceptions of public morals, public order, and human, animal or plant life or health in trade in services, intellectual property and public health, cooperation on labour and employment, small and mediumsized enterprises

China-Iceland FTA

Employment opportunities, living standards, social development and environmental protection

Competition, Intellectual Property Rights, Trade in Services, Investment, Cooperation, Customs Procedures and Trade Facilitation

Sanitary and phytosanitary measures, technical barriers to trade, movement of natural persons, labor and environmental cooperation, small and mediumsized enterprises

China-Korea FTA

Living standards, economic growth and stability, employment opportunities, general welfare, sustainable development

SPS measures, TBT, Trade in Services, Movement of Natural Persons, Investment, Electronic Commerce, Competition, Intellectual Property Rights, Environment and Trade, Economic Cooperation, Transparency

Exception of public purpose for expropriation, protection of personal information in electronic commerce, cultural cooperation

(continued)

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(continued) FTAs

Preamble

Relevant Chapters

Some Articles

China-Australia FTA

Public welfare, economic and social benefits, opportunities for employment, living standards

SPS measures, TBT, Trade in Services, Investment, Movement of Natural Persons, Intellectual Property, Electronic Commerce, Transparency

Exceptions of public morals, public order, and human, animal or plant life or health in trade in investment, online consumer protection, online data protection

China-Georgia FTA

Public welfare, economic and social benefits, opportunities for employment, living standards, protect health, safety and environment, sustainable development

SPS measures, TBT, Trade in Services, Environment and Trade, Competition, Intellectual Property Rights, Areas of Cooperation, Transparency

Movement of natural persons

China-Mauritius FTA

Public welfare

SPS measures, TBT, Trade in Services, Investment, Competition, Intellectual Property Rights, Electronic Commerce, Economic Cooperation, Transparency

Exceptions of public morals, public order, and human, animal or plant life or health in investment and trade in services, movement of natural persons, online consumer protection, online data protection, increasing competitiveness of the industry sector, including SMEs, by promoting the use of science, technology and innovation, exception of public purpose for expropriation

China-Cambodia FTA Public welfare

SPS measures, TBT, Trade in Services, Investment Cooperation, Cooperation under the Belt and Road Initiative Electronic Commerce Economic and Technical Cooperation Transparency

Innovation development of SMEs, environmental measures, online consumer protection, online personal information protection

(continued)

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(continued) FTAs

Preamble

Relevant Chapters

Some Articles

Regional Comprehensive Economic Partnership (RCEP)

Employment opportunities, living standards, public welfare, sustainable development

SPS measures, Standards, Technical Regulations, and Conformity Assessment Procedures, Trade in Services, Temporary Movement of Natural Persons, Investment, Intellectual Property, Electronic Commerce, Competition, Small and Medium Enterprises, Economic and Technical Cooperation

Exception of public purpose for expropriation, online consumer protection, online personal information protection

Source Collected and organized from the FTA texts, available at http://fta.mofcom.gov.cn/index. shtml, 2022

Furthermore, China has instituted a great number of BITs. Through the enforcement of those BITs, as the largest developing country to absorb FDI, China supports substantial and procedural protection for FDI. In summary, although RTAs have become the impetus for adopting a sustainable development approach to trade liberalization, the weak legal effect and the character of disguised barriers to trade of such human rights-related provisions are widely criticized. In recent years, China has become one of the “hub” countries in trade integration, and with the development of its participation in globalization, it has paid more attention to adopting a sustainable development approach to trade liberalization in the FTAs and BITs it has concluded or negotiated with other countries.

4.3 Evolution of Sustainable Development Preservation in the RCEP and CAI On January 1, 2022, the Regional Comprehensive Economic Partnership (RCEP) officially entered into force. As one of the first countries to ratify the treaty, China committed to abiding by the treaty provisions of the RCEP. The negotiations of the China-EU Comprehensive Agreement on Investment (CAI) were officially launched in 2013 and completed on December 30, 2020, after 35 rounds of negotiations. Although the ratification of the CAI has not yet come into force, from the perspective of rules, the CAI and RCEP are regarded as two milestones in the process of China’s integration into the restructuring of world economic and trade rules. By researching the RECP and CAI, we found that China has developed greatly in terms of sustainable development preservation in international economic agreements.

Evolution of Sustainable Development Preservation in RTAs …

4.3.1

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RCEP

In the course of regional exchanges and cooperation, the consensus on sustainable development among RCEP members has increasingly been strengthened. The RCEP launched in 2020 is a legalized outcome of the Asia–Pacific Partnership in the international economic relationship. Building the Asia–Pacific Economic Partnerships needs to be guided by the vision of “building a community with a shared future for humankind” and requires all countries to peacefully coexist in a diverse international community, accommodate the legitimate concerns of other countries while pursuing their own interests, and promote the common development of all countries while pursuing their own development. Although there are no specific chapters for environmental protection, labor protection, transparency and anticorruption, it is nonetheless widely recognized that the protection of human rights is in progress in the RCEP. The main reasons are as follows: (1) The inclusion of rules for disadvantaged subjects Efforts should be made to reduce inequities among members by means of a progressive process of cooperation and a collaborative approach to bridging differences. The region includes high-income economies such as Australia, Japan and New Zealand as well as low-income economies such as Cambodia, Laos and Myanmar. Therefore, RCEP regional cooperation respects developmental differences, takes into account the needs of all parties based on reality, and makes cooperation arrangements based on the developmental stages and interests of RCEP members in order to gradually attract participants and promote the development process. The “Preamble” explicitly takes into account the different levels of development among the parties and their commitments to flexible obligations, especially given the current situation of the least developed countries (LDCs), such as Cambodia, Laos and Myanmar, and provides them with special and differentiated treatment. Furthermore, the “Preamble” promises to help the LDCs increase their participation and expand their trade and investment opportunities and participation in regional and global supply chains. In addition to the “Preamble”, there are 28 places that mention LDCs, and special provisions for LDCS are distributed in Chapter 7, “Trade Remedies”; Chapter 8, “Trade in Services”; and Chapter 11, “Intellectual Property Rights”, covering both substantive provisions and procedural obligations. Chapter 14 provides specifically for small and medium-sized enterprises. One of the stated purposes of Chapter 14 is to support and encourage the participation of small and medium-sized enterprises and to provide them with greater facilitation and development opportunities. (2) Provisions on the pursuit of noneconomic value Chapter 17 incorporates article 20 “General Exceptions” and article 21 “Security Exceptions” of the GATT 1994 as well as article 14 “General Exceptions” of GATS in the WTO, allowing the contracting members to take exceptional measures to protect

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public morals and public order, human and animal life and health in compliance with their domestic laws and regulations. Compared with the WTO, the RECP has added privacy protection and anticorruption provisions. In terms of personal privacy, the RCEP holds that scientific and technological progress and the development of information networks have increased the risk of personal privacy infringement. In the area of anticorruption, Chapter 17 of the RECP contains one provision that the Parties shall take appropriate measures to prevent and counter corruption in relation to matters covered by Chapter 17 and that anticorruption measures shall not apply to the dispute resolution mechanism.17 (3) The achievement of sustainable development with diversified, high value-added and innovative cooperation content Although the contents related to intellectual property rights in the RCEP have not reached the leading level, the RCEP marks the first exploratory step for its members to establish effective intellectual property rights protection standards in their own interests and lays a foundation for relevant claims and rights protection. In the area of e-commerce, the relevant chapters of the RCEP are based on the relevant framework of the CPTPP and expand the rules of the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA) and other bilateral free trade agreements, covering commitments to cross-border data flows, enabling a digital trading environment, and reflecting members’ free and open trade spirit and efforts to further deepen trade partnerships. In the chapter on “Government Procurement”, the members put forward provisions and requirements for public procurement in the region to ensure the transparency of laws, regulations and procedures in the procurement process, to gradually realize the sustainable development of the public procurement process, and to promote the establishment of a responsible consumption mode guided by national policies.18

4.3.2

CAI

Compared with the investment chapters of more than 100 BITs and 21 FTAs that China has already signed, the CAI shows obvious characteristics of comprehensiveness and progressiveness and represents a new paradigm for China to negotiate and sign economic and trade treaties in the future. In addition to the Preamble, the CAI emphasizes that sustainable development is the goal that the parties have committed to pursuing. The fourth part of the CAI not only considers investment liberalization and parties’ regulatory rights but also reflects the importance of diversified social policy goals. The CAI is the treaty with the most concern for sustainable investment among the treaties negotiated and signed 17

FEI Xiuyan, HAN Liyu: An Analysis on the Inclusiveness of RCEP, International Business Research, No. 5, 2021. 18 Xu Qinhua,Yuan Miao: RCEP Opens the Process of Comprehensive and Sustainable development in the Region, Contemporary International Relations, NO. 3, 2021.

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by China, and its provisions on labor, the environment, climate change and corporate social responsibility are worth paying attention to. The CAI includes the most novel environmental chapter in the current economic and trade agreements negotiated by China. In terms of articles, the CAI not only emphasizes the concept of sustainable development but also implements this concept through specific rules, including enterprises’ environmental responsibility for investment and public participation and consultation; requirements for the process and mechanism of implementation review, monitoring and evaluation; and the environmental regulation rights of the host government. The greening of investment rules may impose certain restrictions or constraints on China’s investment in Europe. At the level of protection, the CAI stresses that the Parties should make every effort to ensure that their laws and policies prescribe and encourage the adoption of the highest standards of labor protection and continue to ensure the effective legal implementation of such protection standards. The parties shall not lower labor protection standards or fail to effectively enforce their labor laws for the purpose of attracting or encouraging foreign investment. The CAI recognizes the parties’ right to domestic regulation of labor issues, but the parties cannot use labor protection standards as disguised investment restrictions that cause undue discrimination between investors. The CAI encourages the parties to engage in dialogue and cooperation on issues related to investment and labor rights as a complement to existing bilateral or multilateral mechanisms. In line with the commitment of the parties to enhance the contribution of investment to the sustainable development goals, the two sides agree, in accordance with the 2008 ILO Declaration on Social Justice for Equitable Globalization and the 2019 ILO Declaration on the Next 100 Years of the World of Labour, to promote people-centered, adequate minimum wage protection and social protection at work and safety and health at the investment policy level, as set out in the decent work agenda. One of the major characteristics of the CAI labor clause is that it does not create new labor rights but specifies three obligations for the contracting parties based on the labor convention formulated by the International Labor Organization: commit to the effective implementation of the labor conventions they have ratified, work towards ratifying the ILO Forced Labour Convention (No. 29) and the Convention on the Abolition of Forced Labour (No. 105), and consider ratifying labour conventions classified as “up-to-date” by the ILO. Based on these obligations, the CAI and the implementation of the convention on the International Labor Organization and the supervisory mechanism established close contact, not only embodying in the convention system for the two sides the obligation of labor rights protection but also, in contact with the International Labor Organization, a working mechanism to determine the standard of a “modern” labor convention review mechanism. Although these obligations stipulated by the CAI have no specific commitment arrangement or phased goals and seem to be clauses promoting labor by nature, China still faces certain challenges in fulfilling these obligations. First, the CAI identifies eight of the conventions formulated by the ILO as fundamental or core conventions. China has ratified 4 of them, and the remaining 4 include the Forced Labor

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Convention and the Convention on the Abolition of Forced Labor. The CAI specifically mentions that the parties should pursue ratification of the two basic conventions through proactive and sustained efforts. Second, the International Labor Organization has developed 190 labor conventions, of which 26 have been ratified by China. The CAI requires that China implement these 26 ratified labor conventions effectively, but the implementation critera are unclear. Third, the International Labor Organization has defined 80 modern labor conventions, and China has ratified only 20 of them. According to the demand of the CAI, China should strengthen the International Labor Organization system that it has joined, accelerate the approval of the implementation of the convention relating to the two basic forced labor conventions and the process of modernization of labor convention, and not attract investment in the field of labor or lower the standards of protection, and support domestic enterprises and corporate social responsibility. China’s economic and trade treaties have not yet made such a clear commitment to the protection of labor rights. Therefore, the CAI will exert an important influence on China’s labor legislation and subsequent treaty negotiations. In future amendments to relevant laws such as the Labor Law and the Labor Contract Law, China should consider including the prohibition of forced labor.19

5 The Reconciliation of China’s Legislation: Challenges and Suggestions 5.1 Challenges SD-oriented provisions and the number and proportion of FTAs of China SD-oriented provisions

Number and proportion (%)

SD-oriented provisions

Number and proportion (%)

SPS

15(100%)

Intellectual property

11 (73.3%)

TBT

15(100%)

Investment

15 (100%)

State-owned enterprises

0 (0%)

Labor standard

5 (33.3%)

Government procurement

7 (46.7%)

Regulatory Collaboration

0 (0%)

Trade in services

15 (100%)

Electronic commerce

10 (66.7%) (continued)

19

Shi Jingxia, Chen Xiaoxia: The Paradigm Shift in China’s Negotiating Investment Treaty: A Commentary on the China-EU Comprehensive Agreement on Investment, Chinese Review of International Law, No. 5, 2021.

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(continued) SD-oriented provisions

Number and proportion (%)

SD-oriented provisions

Number and proportion (%)

Competition policy

10 (66.7%)

Anticorruption

1 (0.07%)

Environment

14 (93.3%)

SMEs

11 (73.3%)

Transparency

15 (100%)

Note Statistics in this table relate to 15 FTAs concluded by China, excluding the Mainland, Hong Kong and Macao CEPA and China-Maldives FTA. The “proportion” indicator represents the percentage of FTAs containing such SD-oriented provisions to the total number of FTAs concluded by China Source Data are from statistical processing based on the FTA texts available at http://fta.mofcom. gov.cn/index.shtml, 2022

From the table above, we can definitely conclude that China has made great progress in sustainable development preservation in the paradigm of the negotiation and conclusion of FTAs. First, more types of sustainable development clauses are increasingly being stipulated in the FTAs through stipulations for environmental protection, labor standards, transparency of data privacy protection, negative list management for foreign investment and investors, anticorruption etc. Second, the articles deal with substantive obligations, not just advocacy declarations. However, there are still some challenges for the perfection of these FTAs. (1) The scope of some sustainable development provisions is still limited. The number of treaties containing sustainable development provisions such as anticorruption is still low. Among the 21 FTAs, only the RCEP refers to the anticorruption regulation, and the article is very simple and has no legal enforcement provisions, providing that the parties shall take appropriate measures to prevent and counter corruption in connection with matters covered by chapter 17 and that anticorruption measures shall not apply to the dispute resolution mechanism. (2) Most of the provisions relating to sustainable development are ambiguous and vague, and the substantive contents are insufficient. For example, in the environmental clauses, we can easily determine that most of the environmental clauses in China’s existing FTAs are expressed in terms of “recognition” and “reaffirmation”. Thus, the environmental provisions of China’s FTAs still remain in the general declaration and lack substantial legal effect. The situation is the same for the labor protection provisions. As mentioned above, China’s labor standards are set mainly in the MOU on Labor Cooperation, which is a low-level working document. These standards tend to be declarative provisions without specific legal obligations. (3) The legislative model is not fixed. Whether a country has a mature FTA model is a sign of its international discourse power. Unlike the USA, China has no FTA and BIT models. The preservation of sustainable development is quite different in the 21 FTAs concluded by China.

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For example, there are four legislative modes of environmental clauses in China’s FTAs. First, the environmental protection objective is mentioned in the preamble. The preamble of the China-Iceland FTA points out that economic development, social development and environmental protection are interdependent and mutually promoting components of sustainable development. Second, environmental clauses are scattered in other chapters. For example, in the chapter on cooperation, the provisions for forestry and environmental protection are stipulated in article 162 of the China-Peru FTA, article 108 of the China-Chile FTA and article 96 of the China-Iceland FTA. In the exceptions section, China’s FTAs all stipulate that article 20 of the GATT 1994 can become the content of the agreement after modification. Specifically, subparagraphs (b) and (g) of article 20 of the GATT relate to environmental protection. Third, subsidiary agreements on environmental issues are attached. The Environmental Cooperation Agreement concluded between China and New Zealand on April 7, 2008, is a good example. Fourth, one specific chapter is designated for environmental issues. At present, only the China-Switzerland FTA, China-South Korea FTA and China-Georgia FTA have specific chapters on environmental issues. Therefore, there is no fixed legislative mode for the environmental provisions of FTAs in China, which is not conducive to the formation of the model environmental provisions of FTAs in the future. (4) A dispute settlement mechanism is lacking. An effective dispute settlement mechanism can balance the interests of the parties and safeguard their legitimate rights and interests. For example, the FTAs of China-South Korea and China-Switzerland do not provide dispute settlement mechanisms. It is worth mentioning that only article 6 of the China-Georgia FTA stipulates that for any matters arising from that chapter, the contracting parties can consult only under the framework of the joint committee of the FTA. China’s FTA environmental clauses generally tend to have no dispute settlement mechanism. In the author’s opinion, this may be because the parties have not stipulated substance in substance, and it is naturally not necessary to design a dispute settlement mechanism in procedure. However, it should be noted that as trade between parties becomes more frequent, disputes are inevitable, and it is obviously impractical to have no dispute settlement mechanism.20

20

Wang Liang: Study on environmental Clauses of China free Trade Agreement, Journal of Henan College of Finance & Taxation, No. 1, 2022.

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5.2 Suggestions From the perspective of the international legal regime, China should construct models of sustainable development preservation for FTAs and IIAs with Chinese characteristics, which means that the structure of the summary clause, the substantive obligation clause and dispute settlement mechanism relating to environmental protection, labor standards, transparency, anticorruption and other SD-oriented issues should be considered in the model for the negotiation of future FTAs and IIAs. In addition to the models of FTAs and IIAs, the reconciliation and perfection of China’s domestic legislation are the most urgent issues. Considering the new trends of integration of sustainable development with trade liberalization in some megaregional trading arrangements, China has an incentive to keep pace with the reconstruction of trade and investment rules during the integration of the world economy. The establishment of the China (Shanghai) Pilot Free Trade Zone (CSPFTZ) is a significant measure taken by the Party Central Committee to promote reform and opening up in the new situation and undertakes the major task of exploring new ways and accumulating new experience to comprehensively deepen the reform and opening up. In the Regulations of the China (Shanghai) Pilot Free Trade Zone that came into effect on August 1, 2014, some SD-oriented provisions were stipulated. Those special provisions include fair competition, protection of investors’ rights and interests, protection of laborers’ rights and interests, environmental conservation and intellectual property protection. The notion of “public participation” is embodied in the regulation. The provisions of public participation authorize the public to participate in the formulation of government regulations and normative documents related to the CSPFTZ. With China’s deepening participation in global affairs and domestic reform, the situation of selective adaption of international standards has changed greatly through the dynamics of perception, complementarity and legitimacy, and the role of China in the international system has been changing from that of a “taker” to that of a “builder”. However, there are still some difficulties for China in meeting the new trends of sustainable development preservation in upcoming RTAs such as the CPTPP and TTIP. Those difficulties are as follows. The real problems of regional imbalance affect the uniform and horizontal preservation of sustainable development in the PRC. As we know, China is a unitary state, and the laws stipulated by the NPC are to be implemented countrywide. Therefore, it would be difficult to impose a higher standard of sustainable development preservation that meets the demands of people from wealthy regions in undeveloped regions. For example, regarding environmental standards and regulations, China has a highly centralized system. However, regarding implementation, local environmental protection bureaus are the major parties responsible for environmental protection in China. Because of the low ranking of environmental protection bureaus within the government hierarchy, their decisions may be overridden by more powerful

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government agencies, such as industrial bureaus. The weak institutional capacity of local environmental protection bureaus and the weak enforcement of environmental regulations have been recognized as major obstacles to achieving better compliance.21 Regarding the protection of foreign investors, the preestablished national treatment and negative list approach explored in the CSPFTZ have undoubtedly expanded the protection scope of foreign investors. However, simplifying the “verification” and approval procedures for establishing foreign investment projects does not mean the deregulation of foreign investments, and the focus of administrative management procedures should shift from prior approval to midevent control and subsequent supervision to ensure the normal operation of the market. Compared with prior approval, midevent control and subsequent supervision impose higher requirements on the institutional capacity of governments. Although no FTAs containing SOEs provisions have been signed by China, the reform of SOEs has generally achieved the requirements of the market economy since China entered the WTO, and many laws and regulations have been formulated to meet the increasing demands of the market economy, such as the Anti-monopoly Law, the Company Law, the Civil Code, and the Enterprise Bankruptcy Law. As stipulated by the Constitution of China, the state-owned economy is the leading force in the national economy, and the state ensures the consolidation and growth of the state-owned economy. Therefore, as the main body and concrete executor of the state-owned economy, SOEs, especially large and medium-sized SOEs, inevitably benefit from preferential government policies, such as the IPO market. In the CPTPP, the member countries should be required to operate their SOEs in accordance with the competition chapter, and stricter requirements should be imposed on the operation of SOEs in order to level the playing field with private enterprises and foreign stateowned enterprises. If China becomes a CPTPP member, greater efforts should be made to deepen the reform of SOEs, and the space for further reform is very limited because the reform of SOEs has generally achieved the requirements of the market economy. As the largest developing country with unbalanced regional development, China should persist in the following principles when negotiating the issues of incorporation of sustainable development in trade liberalization: the international community should abide by the principle of common but differentiated responsibilities, and human rights protection should not be used either as a disguised barrier to trade or a tool to interfere with other countries ’ domestic affairs. With the development of NGOs, the insitutional capacity of governments should also be improved to promote human rights protection in China. The improvement of the institutional capacity of governments should include the government coordination system, government perception of international legal standards, working capability and efficiency, and so on. 21

Wanxin Li: A Survey of Instittutional Capacity of Local EPBs in China, Paper prepared for 2005 Urban China Research Network Annual Conforence: Chinese Cities in Transition, Shanghai, China, 2 May 2005.

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Although industrial-policy activism is regarded as one of the barriers for China to fill gaps in its fulfillment of its WTO commitments and to proceed with WTOplus reforms, an industrial restructuring policy should nonetheless be further implemented to balance the different regional economies aiming at the horizontal protection of human rights countrywide. The problem to be solved is how to implement an industrial restructuring policy without infringing on the obligations under the WTO. The reform of SOEs should be deepened and a “safety valve” mechanism should be established to safeguard the national economy. Some exception clauses provided in international agreements, such as “exception of public morals”, “exception of public order”, “exception of public health”, “exception of international payment balance”, and “exception of financial safety”, should be reflected and transformed in the relevant domestic laws and regulations.

Intellectual Property Protection in Free Trade Zones: Main Issues from China’s Perspective in the International Context Hong Yang and Hongsong Song

1 Introduction Free trade zones (FTZs), also termed free zones or foreign zones, have a long history of more than 8 decades in modern economies, developing worldwide at a rapid rate from 79 in 25 countries or economies in 1975 to more than 3,500 in 130 countries or economies in recent years.1 The exact definition and scope of FTZs vary by country and jurisdiction, while their common features or nature are usually an area designated by certain countries where less customs control or fewer relevant trade regulation measures are imposed. According to the Revised Kyoto Convention (hereafter referred to as Kyoto Convention), an FTZ is “a part of the territory of a Contracting Party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the Customs territory.”2 To attract trade flow and foreign investment, FTZs aim to facilitate trade and economic 1 See OECD, OECD Recommendation on Countering Illicit Trade: Enhancing Transparency in Free Trade Zones, 21 October, at https://www.oecd.org/gov/risk/recommendation-enhancing-transpare ncy-free-trade-zones.htm, visited on May 1, 2022. 2 See International Convention on The Simplification And Harmonization of Customs Procedures as amended (Revised Kyoto Convention), Specific Annex D, Chapter 2.

H. Yang Shanghai International College of Intellectual Property (SICIP), Tongji University, Shanghai, China East China University of Political Science and Law, Shanghai, China School of Law, University of California, Berkeley, Berkeley, CA, USA H. Song (B) Law School of Yantai University (China), Intellectual Property Academy of Shandong Province, Yantai, China e-mail: [email protected] University of Queensland, Brisbane, QLD, Australia © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Zhang and X. Tan (eds.), A Chinese Perspective on WTO Reform, https://doi.org/10.1007/978-981-19-8230-9_3

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growth by eliminating tariffs, quotas and other taxes and minimizing bureaucratic requirements, such as customs procedures and disclosure requirements.3 As FTZs are regions with less regulation aiming for a freer flow of goods, law enforcement, especially IP protection, faces certain difficulties in them. Over the years, persistent concerns have been raised over challenges to intellectual property (IP) protection in FTZs under relaxed supervision. In 2013, an ICC report stated that softened measures in FTZs may facilitate abuses of intellectual property rights (IPRs) and create vulnerabilities to counterfeiting and piracy.4 In 2020, the ICC issued an update of that report, again emphasizing these vulnerabilities and suggesting strengthening customs enforcement.5 The World Customs Organization (WCO) and Organization for Economic Co-operation and Development (OECD) have both also expressed concern over illicit trade in counterfeit goods.6 In particular, FTZs often involve goods in transit, goods under parallel importation, or goods under exports with special labeling (re-exports), none of which are regulated by the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) administered by the World Trade Organization (WTO). On the other hand, the realization of the special functions of FTZs in promoting trade requires special treatment of goods in these zones because of the need for coordination between different jurisdictions. This is especially important considering the special territoriality and independence of IP in each jurisdiction, a fundamental principle of IP protection. Against this background, it is necessary to balance the two values of sufficiently protecting IP and ensuring the basic functions of FTZs, raising the difficult question of how to effectively and reasonably maintain IP protection in FTZs. As observed by a WCO report, “strengthening security and compliance inside FZs, while maintaining the benefits of FZs, is crucial.”7 In the 1990s, China established the Wai Gaoqiao bonded area in Shanghai; although this area was not labeled an FTZ at that time, its main functions corresponded to those of FTZs. In 2013, China established the China (Shanghai) Pilot FTZ, its first area under the FTZ name. Since then, China has set up 21 pilot FTZs covering most provinces in its jurisdiction as well as the Hainan free trade port (which

3

See OECD, Online public consultation on the draft OECD Guidance to Counter Illicit Trade, Enhancing Transparency in Free Trade Zones, at https://www.oecd.org/gov/online-public-consul tation-draft-guidance-enhancing-transparency-in-free-trade-zones.htm, visited on May 1, 2022. 4 See ICC, Controlling the Zone: Balancing Facilitation and Control to Combat Illicit Trade in the World’s Free Trade Zones, ICC BASCAP Report Publication, May 2013. 5 See ICC, Controlling the Zone: Balancing Facilitation and Control to Combat Illicit Trade in the World’s Free Trade Zones-Seminal Report, ICC BASCAP Report Publication, 2020. 6 See WCO, Practical Guidance on Free Zones, WCOOMD.org, 2020. Additionally, see OECD/EUIPO, Trade in Counterfeit Goods and Free Trade Zones: Evidence from Recent Trends, in OECD Series, Illicit Trade, OECD Publishing, Paris/EUIPO, Alicante, 2018. 7 Kenji Omi, ‘Extraterritoriality’ of Free Zones: The Necessity for Enhanced Customs Involvement, WCO Research Paper No. 47, WCO Publication, September 2019, p. 26.

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essentially also embraces an FTZ).8 FTZs are playing an increasingly important role in China’s economic development; thus, issues of IP protection in FTZs have also become a key topic. The difficulty of balancing IP protection and the free policy of FTZs has created a special dilemma for China, as it has placed greater emphasis on strong and fast protection for IP in recent years. The question for China is even more complex because of the need to implement open and free policies that do not impede the efficient operation of FTZs while maintaining a high level of IP protection to prevent FTZs from becoming a “free zone” for counterfeit and pirated goods.

2 Legal Status of FTZs and Application of IP Laws in Them Traditionally, the concept of an FTZ is based on customs administration, mainly with temporary exemption from tariffs as well as less customs control. In China, however, FTZs (termed pilot FTZs in a broader sense to be discussed in Part IV) have been empowered with more functions than just customs issues, including economic reform measures in a larger context. Nevertheless, FTZs in China are still essentially based on customs systems, and special customs measures are the key contents of the relevant laws and policies.

2.1 Legal Status of FTZs and Goods Within Them A review of famous FTZs around the world reveals that their legal status is established through different legal arrangements, but customs law is a common feature. Among the jurisdictions that have established FTZs, some, such as the EU, Singapore, and Malaysia, have provided for the relevant procedures through their customs codes. In addition, Singapore, Malaysia, the U.S. and Korea have created special legislation for FTZs, such as the Free Zone Act of Malaysia, the Foreign Trade Zones Act of the U.S., and the Special Act on Free Economic Zone of South Korea. Such legislations usually focus on matters such as tariffs and customs administration and thus is, at least to a certain extent, part of the customs law system. Moreover, the specific regulation of FTZs in these jurisdictions varies: the EU regulates the establishment and treatment of FTZs only through customs legislation, while other relevant jurisdictions have adopted FTZ-specific legislation, with customs legislation as a supplement. Specifically, South Korea and the U.S. regulate relevant matters, including customs procedures, only through special independent legislation. The 1992 Customs Code of the European Community provides for “Free Zones and Free Warehouses” (roughly corresponding to the concept of an FTZ) in a special chapter 8

China’s pilot FTZs are much broader in the scope covered, with not only FTZs in the strict sense worldwide but also some economic reform zones beyond special customs areas. This will be further addressed in Part IV of the chapter.

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of Title IV, Chapter III, which continues in the form of a special chapter through several subsequent revisions of the code.9 The Customs Act of both Singapore and Malaysia provide for the meaning and special status of FTZs in principle only, with Singapore mentioning FTZs as a kind of storage area in the specific procedures of its Customs Act and Malaysia not providing any specific procedures in its Customs Act. Both South Korea and the United States provide for FTZs only in their specific FTZ legislation, and there is no coverage of FTZs in their customs legislation. Among the jurisdictions that have established FTZs, except for the European Union, there is usually a special legislation governing FTZ-related matters. Such special legislation is still governed by the customs rules and customs laws of these countries, which often provide for the establishment of FTZs in principle. For example, the U.S. has placed its Foreign Trade Zones Act under the “Customs Regulations” title as a sectoral law in the U.S. Code. In contrast, the EU has provided for FTZs only through its Customs Code, which more clearly indicates that the legal issues involved are mainly customs rules. Regardless of the various legislative approaches adopted, the legal status of FTZs in various jurisdictions shares certain common characteristics, such as special treatment under universal customs supervision compared with general imports and exports. On the one hand, goods in FTZs are treated differently from imported and exported goods in terms of tariffs, customs administration procedures, etc. On the other hand, these goods are under the universal customs supervision system together with imports and exports, and procedures regarding them may be compatible and convertible with the latter procedures. For example, in the Customs Act of Singapore, when defining the customs territory, section 3 (1) states that an FTZ does not fall within the customs territory, and section 2 (2) adds that, subject to other provisions, this Act does not apply to any act or thing lawfully done within an FTZ. However, section 3 (2) specifically provides that goods in an FTZ are still subject to customs control procedures. The EU Customs Code, U.S. Foreign Trade Zones Act, and Free Zone Act of Malaysia also share a similar arrangement of placing FTZs under special treatment in a customs sense while ensuring that they are still under customs supervision. Notably, in the Kyoto Convention, though it lists “customs warehouses and free zones” in an annex parallel with importation, exportation and transit, the actual provisions of the annex show that it is special and separate in the sense of its special treatment of import duties and taxes and that goods in free zones are still subject to a “customs procedure” such as export and processing rather than having a specific customs procedure of “free zone” per se that applies to them.10 For example, while “inward processing” and even “customs warehouses” in the same annex as “free zones” are categorized as “customs procedures”, a free zone itself is not stipulated as a “customs procedure” in the same annex under the convention.11

9

Now the Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 Laying Down the Union Customs Code, 2013 (Recast). 10 See supra note 2, Specific Annex D, Chapter 2. 11 See ibid, Specific Annex F, Chapter 1, Specific Annex D, Chapter 1.

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Therefore, the special features of FTZs are reflected mainly in temporary exemptions from customs duties and formalities while the goods are in the zone. However, in the sense of general customs supervision or regulation by other legal frameworks, an FTZ is not an absolutely separate area or procedure independent of non-FTZs, or “common” areas or procedures. Rather, it is the goods within an FTZ rather than the zone itself that are subject to legal regulation; moreover, the goods within FTZs are still compatible with or even interchangeable with classical customs procedures such as imports, exports and transit. The definition of export in section 3 (1) of the Customs Act of Singapore includes the transport of goods to FTZs, while section 28 provides that the transport of goods from FTZs to the customs territory is also treated as an import. Furthermore, when section 3 (1) defines import and export, it distinguishes these two procedures from “transit”, which is a separate and independent procedure and includes goods transported from abroad to FTZs or trans-shipped therein.12 Other jurisdictions, including the U.S., EU, and Malaysia, have similar arrangements. The Foreign Trade Zones Act of the U.S. provides that FTZs (referred to in the Act as “foreign trade zones”) are a specific area, rather than a separate customs procedure, where goods are temporarily exempt from customs duties but will still be treated as imports or exports when sent from the zone into or out of U.S. customs territory.13 The U.S. Xerox case in 1982 also indicated that a foreign trade zone could include goods in transit, with the U.S. Supreme Court stating that the Foreign Trade Zones Act allows “goods in transit” in such zones to be exempt from duty until they are “re-exported”.14 According to the EU Customs Code, goods in a free zone can also be attributed to or converted to typical customs procedures such as export, transit, import or inward processing.15 For China, the above characteristics also apply to its FTZs, with essential parts of these FTZs being defined as special customs supervision areas under China’s Customs Law. However, China’s FTZs usually have a broader geographical scope and are empowered with more economic functions. Issues related to China’s FTZs will be further discussed later. In summary, an FTZ is meaningful mainly in the sense of customs procedures, although it is not a typical customs procedure itself, parallel to or mutually exclusive with real customs procedures, such as export, import or transit. FTZs are still under customs supervision, with only partial and temporary exemptions from tariffs and other formalities. Moreover, it is mainly the goods in an FTZ rather than the zone itself that are under supervision, and these goods are still under customs control, as well as being regulated by general customs rules corresponding to typical procedures such as export, import or transit, except for the abovementioned temporary exemption from tariffs and certain measures.

12

See Customs Act 1960 of Singapore, as revised in 2020, Section 3, Section 28. See U.S. Foreign-Trade Zones Act, 19 USC, Section 81 (c). 14 See Xerox Corp. v. County of Harris, 459 U.S. at 150, 103 S.CT. at 526 (1982). 15 See Regulation (EU) No 952/2013 of the European Parliament and of the Council of 9 October 2013 Laying Down the Union Customs Code, 2013 (Recast), Art. 157, 159, 179, 245, 246. 13

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The multiple functions of FTZs mean that, despite their common feature of temporary exemption, goods in such zones may have different statuses, with various final destinations that include being taken into customs territory, brought to other countries, or trans-shipped to new destinations; they may even be in a pending or waiting state. Accordingly, they will eventually fall under such typical customs procedures as import, export, or transit.

2.2 Application of IP Laws in FTZs: Substantive Rules and Border Measures 2.2.1

Substantive IP Laws

As discussed above, since FTZs feature mainly exemptions or simplifications of customs measures such as tariffs, an FTZ is not a special area with respect to the application of legal rules other than customs administration or certain economic policies and regulations (existing mainly in China). This is particularly true of the application of IP laws, especially substantive rules of IP protection. In most jurisdictions, an FTZ is treated as outside only the “customs territory”, while it is undoubtedly still within the territory of the country that established it. In terms of the application of substantive rules of IP, which generally does not take into account any specialty about customs territory, there is no difference between an FTZ and non-FTZ areas, whether from the perspective of existing IP legislation, judicial practices, or jurisprudence and theories. The special customs formality measures or certain economic functions of FTZs do not substantially change this situation. However, it is worth noting and highly relevant to the topic of this chapter that special issues are associated with the application of substantive laws when certain typical goods with more connection to international trade or cross-border activities are involved. As FTZs are established mainly for a more convenient flow of goods in international trade, certain goods with more trade concerns and under more special arrangements, such as goods in transit, goods under parallel importation, and goods with labels processed specifically for export, will be more closely related to such zones and placed therein. Such goods typically related to FTZs will involve more consideration under territoriality and thus incur more special concerns when substantive rules are applied. Territoriality is the fundamental principle of IP protection that demands that domestic IP laws shall apply only to activities occurring within that territory and that the effect of an IP right is limited to the territory of the state granting it. The three types of goods typically related to FTZs, namely, goods of in-transit procedure, parallel importation, and with labels processed for export, usually involve activities occurring partially abroad, with conflicts and the need to coordinate rights between at least two jurisdictions. This leads to more controversies and challenges in the application of substantive laws.

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Accordingly, the main substantive law issues of IP protection in FTZs are not related to how general IP laws are applied in a special way or to any exceptions in such zones but are related mainly to special issues of IP protection of typical goods related to FTZs and the relevant determination of infringement of such goods. In addition, certain special issues of IPR enforcement in FTZs, particularly border measures/customs protection, are more directly relevant to FTZs, as FTZs are usually regions directly stipulated by customs laws that encompass IP enforcement and protection.

2.2.2

Customs Border Measures

Generally, FTZs are no exception to border measures for protecting IP, similar to the status of application of substantive IP laws in such zones. However, FTZs may have more special features compared with the general application of substantive rules. IP border measures are a special customs enforcement regime. On the one hand, this regime is part of the customs enforcement system implemented by the customs authorities, and on the other hand, it is based on IP rights, a property legal system completely independent of general customs laws. In some countries, such measures are provided for in IP laws rather than customs legislation. This adds to the complexity of border measures in FTZs, but in any case, it is clear that border measures/customs enforcement regime is an integral part of the regulatory system of customs law. As noted earlier, most jurisdictions have confirmed that FTZs, especially goods in FTZs, remain subject to customs regulation except for exemptions from tariffs and certain formality measures. Customs enforcement of IP rights is definitely not exempt from customs regulations, such as tariffs and formalities. Based on the previous analysis, an FTZ is not a specific typical procedure under customs law; accordingly, the IP border measures for FTZs are also generally focused on goods under different statuses in FTZs rather than toward the FTZ itself. The border measures in FTZs still correspond to FTZ goods ultimately passing through different customs procedures, such as export, import or transit. This involves greater complexity than substantive legal issues in FTZs, as border measures for different customs procedures are often different when IP protection is involved. Moreover, there are great differences in border measures adopted by various national laws for the same customs procedures. Accordingly, in FTZs of one jurisdiction, goods currently under or to be classified under different customs procedures will be subject to different border measures, while goods currently under or to be classified under one certain customs procedure may be subject to different border measures in FTZs of different jurisdictions. For instance, border measures in Singapore, Malaysia, Switzerland and Canada are provided for not in these countries’ customs laws but as a border enforcement chapter in their IP legislation, with Singapore and Switzerland providing for such measures in their Trademark Act and Copyright Act, respectively, and Malaysia stipulating them only in its Trademark Act. While the customs laws in these countries all establish provisions for FTZs, the IP border measures in their IP legislation are still applied to

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typical customs procedures, such as import, export or transit, rather than to an FTZ itself, and FTZs are not even mentioned in such border measures rules. In addition, their border measures for goods in transit, which are one of the typical goods in FTZs, are usually more lenient or allow certain special arrangements. The U.S. also has rules about FTZs under its customs legal system, although it has established border measures aimed toward import and export procedures rather than FTZ areas as a whole, thus treating FTZs only as part of import and export procedures. In contrast to the aforementioned countries, the U.S. does not adopt more lenient measures for goods in transit. Whatever the specific border measures are, most jurisdictions establishing FTZs do not specifically target an FTZ itself as the subject of IP border measures but apply the measures to such typical customs procedures as import, export and transit of goods, including goods under typical customs procedures with physical storage or stay in FTZs. On the other hand, it is worth noting that at the international treaty level, some regional free trade agreements (FTAs) and regional legislation stipulate that FTZs are an independent subject of border measures. In most FTAs entered into by the U.S., as well as the EU-Korea FTA and China-Korea FTA, provisions of IP border measures list FTZs as separate subjects of border measures parallel with import, export and even transit.16 The EU Customs Enforcement of Intellectual Property Rights Regulation 2013 (hereafter “EU IPRs Customs Regulation”) adopts a similar regulatory approach.17 However, this does not mean that the relevant FTA or treaty member jurisdictions treat FTZs as an independent customs procedure that is legally parallel or mutually exclusive with import and export procedures in their IP enforcement regimes or even in their broader legal system related to IP. What may be inferred is only that FTZs are still under customs control, especially in terms of IP customs enforcement. For example, Article 10.67 of the EU-Korea FTA lists “customs transit”, “suspensive procedures” and “free zones” as coexisting subjects of border measures in parallel, with a footnote clarifying that “customs transit” and “placement under a free zone” are as defined in the Kyoto Convention. As discussed earlier, in that convention, a free zone is only an area rather than a customs procedure such as “customs transit”. In addition, the EU Customs Code provides a relevant special treatment of free zones by symbolically treating them as a “customs procedure”, while in fact, a free zone is more an area where goods may be transferable to other customs procedures.18 Despite the placement of FTZs independently and in parallel with typical customs procedures such as exports in border measures provisions in some FTAs or EU 16

See Free Trade Agreement between the European Union and its Member States, of the One Part, and the Republic of Korea, of the Other Part, Art. 10.67.1. Also see Free Trade Agreement between the Government of the People’s Republic of China and the Government of the Republic of Korea, June 2015, Art. 15.26.1. 17 See Regulation (EU) No 608/2013 of the European Parliament and of the Council of 12 June 2013 Concerning Customs Enforcement of Intellectual Property Rights and Repealing Council Regulation (EC) No 1383/2003, Art. 1(c). 18 See supra note 15, Art. 245, 246.

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legislation, the reason for such placement is mainly to emphasize that FTZs are still under the supervision of IP enforcement rather than to define FTZs as an independent customs procedure that is wholly parallel with typical customs procedures. However, the interpretation of the different legislative systems of the parties to these agreements may cause ambiguity. As emphasized earlier, from the perspective of IP protection, including issues of enforcement of border measures, an FTZ is not a typical independent customs procedure itself but rather is an area with placement or stay of goods currently under or about to subject to different customs procedures. An FTZ is totally under the supervision of the IP enforcement system, while specific border measures will still be applied in terms of the specific status (customs procedure) of relevant goods. In this regard, border measures in FTZs are indeed special to some extent, as certain typical goods in FTZs have special features, especially goods in transit (broadly including goods under temporary storage, warehousing or transshipment). Goods in transit are often treated with special IP border measures in some countries and thus raise special issues of IP protection closely related to FTZs, which will be discussed later.

3 IP Protection for Goods Typically Related to FTZs: China’s Practices in the International Context 3.1 Overview of Goods Typically Related to FTZs As discussed above, in terms of IP protection, an FTZ itself is not a universal and inseparable object of either substantive law or border measures through customs enforcement. While the application of substantive IP laws has no special features for FTZs, customs enforcement is indeed more special with regard not to the FTZ itself but to the goods within it. Based on the special objectives and functions of FTZs to promote free trade and simplify regulation measures, there will be more goods with special features and special customs administration status in FTZs. Such goods mainly include those that only pass through or are temporarily stored/warehoused in the territory where the FTZ is located or that involve using imported materials for processing and reexporting. In addition, certain goods are imported into FTZs and traded or consumed within such areas only. Those goods usually need to take advantage of the special functions of FTZs with respect to exemption from duties and regulation formalities such as quota and license. Accordingly, customs measures, including IP border measures for such goods, might be more lenient and take special considerations into account, especially the features of temporary stay or close links with foreign orders and sales. Against the background of IP protection, such goods mainly include goods in transit, goods under parallel importation and goods under processing for exportation. Several important cases to be further discussed later concern special IP consideration

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of such goods in FTZs. The Xerox decision of trademark infringement by the U.S. Supreme Court stated that goods in transit use foreign trade zones to be exempt from duty until they are “re-exported”, according to the Foreign Trade Zones Act. Other U.S. IP cases, such as A.T. Cross, Reebok and Ocean Garden, also involve goods in mere transit through or temporary storage in foreign trade zones. In China, the famous trademark case of HONDAKIT involving label processing also concerns acts occurring in the Rui Li FTZ of Yunnan Province. Some parallel importation cases have also occurred in FTZs in China. On the one hand, although such goods have a special status and more often resort to the convenience of staying in FTZs, they are not required or certain to appear in FTZs, as they can also stay in non-FTZ areas. Accordingly, they should be categorized as goods “typically related to FTZs” rather than absolutely FTZ goods. However, considering that customs measures mainly target goods based on their status or the procedures involving them, IP issues for such goods typically related to FTZs are indeed among the main issues regarding IP protection in these zones. In addition, the analysis of IP protection for such goods is based on substantive rules for deciding their legality as a premise for further exploring customs enforcement issues more directly related to FTZs.

3.2 Goods in Transit In certain legislations or treaties, such as the EU Customs Code and Kyoto Convention, “transit” is used in a narrow sense in parallel with other procedures, such as “customs warehouses” or “temporary admission”. However, transit, in a broader sense, may include all procedures involving temporary stay/storage in the territory of a jurisdiction and not entering its customs territory as the final destination. Thus, transit embraces not only customs transit and transshipment but also certain occasions in customs warehouses, temporary admission, and even inward processing. The stipulation of transit in GATT 1994 endorses this observation. According to Article V.1, “[g]oods … shall be deemed to be in transit across the territory of a contracting party when the passage across such territory, with or without transshipment, warehousing, breaking bulk, or change in the mode of transport, is only a portion of a complete journey beginning and terminating beyond the frontier of the contracting party across whose territory the traffic passes”.

3.2.1

International Context

There is a key question of whether goods in transit that would infringe IP rights in a transit jurisdiction should be considered to be infringing and subject to enforcement measures in the transit jurisdiction. No international IP treaty has answered this question in the affirmative, leaving room for certain controversies between different jurisdictions. Article 51 of the TRIPS Agreement only mandatorily requires members

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to adopt border measures against the importation of counterfeit trademarks or pirated copyright goods and allows members to voluntarily adopt border measures regarding infringing goods destined for exportation from their territories. However, footnote 13 of Article 51 specifically states that there shall be no obligation to apply border measures to goods in transit. This different approach to transit compared with import and export implies TRIPS members’ universal reluctance to ensure the legality of goods in transit under IP laws. Similarly, although border measures are applied to goods in transit once on the table among the negotiating parties of the Anti-Counterfeiting Trade Agreement (ACTA), the final text only obligates the contracting parties to apply border measures to import and export, allowing them to choose whether to apply border measures to goods in transit.19 Interestingly, the Comprehensive Progressive Trans-Pacific Partnership Agreement (CPTPP) appeared to have gone further but actually made no substantial progress. On the one hand, parties are required by Article 18.76.5 to allow the initiation of border measures ex officio with respect to suspected counterfeit trademarks, confusingly similar trademarks, or pirated copyright goods that are imported, destined for export, or in transit; on the other hand, footnote 123 of this article makes it clear that parties may avoid this obligation and choose an alternative through an “endeavor to provide” information to the party of destination so that the party of destination may identify the suspect goods. Apparently, at the international level, IP issues of goods in transit continue to be treated with caution. The stronger protection level of the CPTPP together with its continued abstention from confirming this issue only added to that caution. The strong controversy regarding this issue may be rooted in the fundamental principle of territoriality of IP protection, which requires domestic IP laws to apply only to activities occurring within that territory. Territoriality has been confirmed by important international treaties in the field of IP, not only indirectly reflected in the principles of substantive minimum standards and national treatment but also more directly enshrined in the principle of independence in Article 4bis.1 of the Paris Convention for the Protection of Industrial Property and Article 5 (2) of the Berne Convention for the Protection of Literary and Artistic Works, both of which were incorporated into the TRIPS Agreement under the WTO regime. A strict interpretation of territoriality applicable to goods in the act of transit means that mere temporary transit through a jurisdiction lacks sufficient connection to that jurisdiction in terms of the domestic effect and thus supports a determination that goods in transit are not to be judged by the IP laws of the transit jurisdiction as infringing or not. Nevertheless, conflicting theories and practices do exist and have incurred fierce debate. Some EU members, such as the Netherlands and Germany, formerly seized goods transiting EU ports suspected of infringing on IP rights in the transit country and brought them to courts applying the domestic IP laws of that country to determine infringement based on a theory of “manufacture fiction”, treating such goods as if

19

Anti-Counterfeiting Trade Agreement, December 2010, Article 16.

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they had been manufactured within the territory of the transit country.20 Such judicial or enforcement practices often targeted large developing traders, including China, India and Brazil, and as they were applied without consideration of the legal status of the in-transit goods in the country of origin and the country of destination, they were opposed by some developing countries. Strong complaints were made by developing traders, accusing such practices of being an unreasonable interruption of legitimate trade. India and Brazil even initiated complaints under the WTO dispute settlement procedure about the EU’s seizures of generic medicines in transit through Europe to destinations in Latin America, Oceania, and Africa.21 This unilateral approach was judged by academics to be “expanding the notion of substantive IP infringement to mere transit”, causing the number of territorial IP systems to be “reduced dramatically”.22 It has also been criticized as a “long arm extension of jurisdiction that the European Union has claimed to abhor when adopted by U.S. antitrust authorities”.23 In July 2011, an “Understanding on Issue of Seizure of Indian Generic Drugs”24 was reached between India and the EU concerning the abovementioned pending WTO complaint, and the EU agreed to modify its measures against goods merely in transit. More importantly, the Court of Justice of the European Union (CJEU) issued a deeply influential decision in the “Philips/Nokia” case in the same year. In the two joined cases, the national courts of Belgium and the UK both submitted requests for the CJEU to decide whether border measures should be taken by their customs offices to detain in-transit goods (temporarily warehoused or external transit procedures under the EU Customs Code) based on mere suspicion of their diversion into the EU market and infringement of design and trademark rights protected in these two countries. In December 2011, the CJEU issued an opinion that goods coming from a non-member state that are imitations or copies of IP protected in the EU cannot be classified as ‘counterfeit goods’ or ‘pirated goods’ merely on the basis of being under a suspensive procedure (transit in a broader sense). Those goods may be decided as infringing only when it is proven that they are intended to be sold in

20

See Olivier Vrins and Marius Schneider (eds.), Enforcement of Intellectual Property Rights through Border Measures—Law and Practice in the EU (Second Edition), Oxford University Press, 2012, p. 153. 21 European Union and A Member State—Seizure of Drugs in Transit, Request for Consultations By India, WT/DS408/1, G/L/921, IP/D/28; Request for Consultations by Brazil, WT/DS409/1, G/L/922, IP/D/29, 19 May 2010. 22 See Alexander Peukert, Territoriality and Extraterritoriality in Intellectual Property Law, in Gunther Handl, Joachim Zekoll and Peer Zumbansen (eds.), Beyond Territoriality: Transnational Legal Authority in an Age of Globalization, Queen Mary Studies in International Law, Brill Academic Publishing, Leiden/Boston, 2012. 23 See Frederick M. Abbott, Seizure of Generic Pharmaceuticals in Transit Based on Allegations of Patent Infringement: A Threat to International Trade, Development and Public Welfare, World Intellectual Property Organization Journal (WIPO), Vol. 1, 2009. 24 Press Release, Government of India Ministry of Commerce and Industry, Indian EU Reach an Understanding on Issue of Seizure of Indian Generic Drugs in Transit (July 2011), at http://pib.nic. in/newsite/erelease.aspx?relid=73554.

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the EU, and customs may suspend such goods when there are grounds for suspicion of infringement under the abovementioned norms.25 As a consequence, the EU dropped the long-practiced seizures of in-transit goods based on mere “manufacturing fiction” and established a guideline that such goods are not infringing because of their mere transit through the EU unless there is evidence that they are intended for the EU market. This change was confirmed by a comment that the judgment “reflects application of the principles of territoriality and independence of IP rights”.26 Not ending the story, the EU still made a certain roundabout compromise with that guideline in its later development, limited to trademarks. In 2015, the EU modified its Trademark Directive27 to adopt a new standard pulling back its position toward trademark protection related to in-transit goods to a place between the previous CJEU judgment and its earlier unilateral approach of absolute measures against such goods. Article 10.4 of this directive entitles the proprietor of the registered trademark “to prevent all third parties from bringing goods, in the course of trade, into the Member State where the trade mark is registered, without being released for free circulation there, where such goods, including the packaging thereof, come from third countries and bear without authorization a trade mark which is identical with the trade mark registered in respect of such goods, or which cannot be distinguished in its essential aspects from that trade mark.” However, the abovementioned entitlement of the trademark proprietor “shall lapse if, during the proceedings to determine whether the registered trade mark has been infringed, initiated in accordance with Regulation (EU) No 608/2013, evidence is provided by the declarant or the holder of the goods that the proprietor of the registered trade mark is not entitled to prohibit the placing of the goods on the market in the country of final destination.” Through that legislation, in addition to the rules of the CJEU judgment, the EU provides a presumed right of trademark owners to prevent acts of transit unless certain additional facts are proven,28 thus adding a responsibility of demonstration to the holder of such goods to prove that the EU trademark owner does not have trademark rights for the goods in the country of final destination. This also creates a presumption under substantive law that goods in transit are under the control of trademark rights in the EU. This development shows that while the EU is careful not to break the fundamental principle of territoriality when dealing with IP protection with respect to goods in transit, it has maintained its attempt to provide protection as strongly as possible for EU rights owners, ensuring the continuation of its high IP protection standards. 25

Judgment of the Court of Justice of European Union, Joined Cases C 446/09 and C 495/09, 1 December 2011, para. 78. 26 Frederick M. Abbott, Thomas Cottier and Francis Gurry, International Intellectual Property in an Integrated World Economy (fourth edition), New York: Wolters Kluwer, 2019, p. 88. 27 Directive (EU) 2015/2436 of the European Parliament and of the Council of 16 December 2015 to approximate the laws of the member states relating to trademarks. 28 The relevantly complex wording in Art. 10.4 about “bringing goods into the member states” “without being released for free circulation there” is just the EU’s legal definition of what is generalized as “goods in transit in a broader sense” in this chapter, according to EU customs rules.

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For the U.S., however, it seems more self-evidently rightful to take measures against goods in transit based on IP protection. The meaning of “import” in U.S. customs regulations has consistently been interpreted broadly by the courts to include “transit” situations. As early as 1923, the U.S. Supreme Court stated, “If there be an actual bringing in, it is importation, regardless of the mode in which it is effected. Entry through a customhouse is not of the essence of the Act.”29 In U.S. v. Watches, Watch Parts and Calculators, etc., the District Court for the Southern District of Florida decided that merchandise in transit and “actually unladed” according to customs forms, “though not intended to be introduced into the stream of commerce of the United States, was imported for purposes of application of the Trademark laws.”30 In A.T. Cross Co. v. Sunil Trading Corp. and Reebok Int’l LTD v. American Sales Corp, both of which involved goods in transit temporarily within U.S. foreign trade zones, both courts confirmed the application of trademark law to such goods. In the former, the District Court for the Southern District of New York stated, “Since the Commerce Clause extends into the foreign trade zone…the jurisdictional parameters of the Lanham Act reach within the foreign trade zone”, and “the Customs officials are given a substantial amount of authority not only in admitting and exporting goods from the zone, but also in dealing with the goods while therein”.31 In the latter case, the District Court for the Central District of California affirmed the logic in the former case.32 Furthermore, in Ocean Garden, Inc. v. Marktrade Co., Inc., which also concerned goods transiting the U.S. through its foreign trade zone, the court found that “infringing goods in these zones are not precluded from the customs law” and reaffirmed the previous A.T. Cross court’s opinion that “the Commerce Clause extends into the foreign trade zone, and the jurisdictional reach of the Lanham Act is coextensive therewith.”33 Moreover, most FTAs in which the U.S. has participated have explicitly provided IP border measures for goods in transit, involving more than a dozen jurisdictions, including South Korea, Colombia, Chile, Morocco, Peru, Panama, Oman, Bahrain, and the Central American countries. The more recent USMCA also provided without reservation the ex officio power of customs to take measures against goods in transit or entering/exiting free trade zones,34 in sharp contrast with the soft position held by the CPTPP on the same issue.35 The measures in these FTAs are generally consistent, with the U.S.-Korea FTA and USMCA constituting representative examples, and the import, export, transit, and 29

Cunard Steamship Co. v. Mellon, 262 U.S. 100, 122, 43 S.Ct at 504, 507 (1923). U.S. v. Watches, Watch Parts, Calculators and Misc. Parts, 692 F. Supp. 1317 (S.D. Fla. 1988). 31 A.T. Cross Co. v. Sunil Trading Corp., 467 F. Supp. 47 (S.D.N.Y. 1979). 32 Reebok Int’l LTD v. American Sales Corp., 11 USPQ.2d 1229 (C.D.Cal. 1989). 33 Ocean Garden, Inc. v. Marktrade Co., Inc., 953 F.2d 500 (9th Cir. 1991). 34 As discussed previously, free trade zones are placed here in parallel with import, export and transit, mainly in a flexible way (quoting the Kyoto Convention) rather than a strict customs procedure, in order to emphasize the inclusion of such zones under supervision. 35 Agreement between the United States of America, the United Mexican States, and Canada, Chapter 20, Art. 20.83.5. 30

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entering/exiting free trade zones of goods suspected of being “counterfeit trademark goods,” or “pirated copyright goods” are generally the objects of such measures. For some FTAs, such as the U.S.-Korea FTA and U.S. FTAs with Panama, Morocco, and the Central American countries, where the U.S. imposed stronger protection standards, the measures may be further extended to more types of IP, such as “confusingly similar trademark goods”, and even all types of IP infringements. Both “counterfeiting” and “piracy” are determined in accordance with the “laws of the country of importation”, which according to U.S. laws also actually covers transit (or FTZs), as mentioned earlier.

3.2.2

China

As a statutory law system, China’s current legislation has not provided any rules about IP protection related to goods in transit or FTZs. There is no case guidance or judicial interpretation with regard to this issue. First, none of China’s substantive IP laws (mainly the Copyright Law, Trademark Law, and Patent Law of the PRC) provide any right to authorize or prevent the transit of goods, with the Patent Law providing a right of importation only. Second, China’s IP border measures legislation does not cover goods in transit. In the Regulation on Customs Protection of Intellectual Property,36 the objects of customs IP protection measures are restricted to imported and exported goods. Notably, under China’s Customs Law, “import” is used in a narrow sense, in contrast with practices in the U.S., and goods in transit are thus strictly differentiated imported goods. In addition, China is a relevantly strict follower of territoriality. Although it is not explicitly reflected in legislation, authoritative scholars have pointed out that territoriality has long been accepted as a basic characteristic of IPRs by Chinese IP academics.37 It is also treated as an element of jurisprudence, with most IP infringement judgments with cross-border elements38 citing it to partly support the analysis. As a practical footnote to its position in this regard, China was also cautious about the effects of TRIPS-Plus border measures advocated by the IP provisions in ACTA and the former TPP. In 2010, in the meeting of the WTO Council to review the TRIPS Agreement, China and India expressed their concerns that the “delicate balance” in the TRIPS Agreement resulting from “long-term arduous negotiations” would be at risk and that TRIPS-Plus border measures would distort trade or create trade barriers and disrupt goods in transit or transshipment.39 36

Regulations of the People’s Republic of China on Customs Protection of Intellectual Property (as amended in 2018), Art. 2, 12, 16. 37 Zheng Chengsi, Intellectual Property Law, Law Press, 1997. Wu Handong, General Principles of Intellectual Property Law, China Renmin University Press, 2013. 38 Especially label-processing trademark cases in China, which will be discussed later. 39 Council debates anti-counterfeiting talks, patents on life, WTO: 2010 NEWS ITEMS, 8 and 9 June 2010, at https://www.wto.org/english/news_e/news10_e/trip_08jun10_e.htm, visited May 20, 2022.

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Therefore, it might be fair to say that goods in transit are not infringing under China’s IP laws; moreover, China’s customs authorities do not have the legal authority to take measures against such goods. Until now, there has been no case of infringement action or border measures deciding the IP infringement of goods in transit in China. However, what makes that statement slightly more complex is that the attitude of the Chinese government toward border measures for goods in transit appears to have changed in recent years. In the China-Korea FTA, the border measures provisions cover occasions of “importation, exportation, transshipment, and carry-in into the bonded area including into free trade zone”, with “transshipment” being a typical type of transit and “free trade zone” inevitably including goods in transit.40 Those two occasions related to transit or FTZs were stipulated in such border measures provisions for the first time in an FTA joined by China, and the addition of them made the border measures in the China-Korea FTA closer to the TRIPS-Plus customs enforcement standards in FTAs participated in by the U.S. Without further public information about the negotiation background of the ChinaKorea FTA, it is difficult to determine why and to what extent the relevant provisions were accepted by China and how they would be enforced, as well as the exact requirements it might impose on China to amend its IP Customs Protection Regulation. Whatever the reading of this development might be, a radical interpretation that China has switched to the U.S. approach to in-transit goods and FTZs is not appropriate or realistic considering China’s practices and continuous position regarding territoriality. As analyzed earlier, the legal identification of goods in transit or related to FTZs needs to be understood essentially as based on the legislation and judicial standards of the domestic legal system within a particular jurisdiction. Additionally, border measures in FTAs that cover transit or FTZs are included mainly to emphasize that such goods or areas are still under customs enforcement supervision rather than to require the direct imposition of absolute measures such as suspension or detention based on mere transit or entry into FTZs. After all, FTZs are not a real customs procedure in parallel with import or export and coexist with transit under the Kyoto Convention, and most FTAs have quoted that convention to define the relevant terms of transit or FTZs. The EU-Korea FTA discussed earlier is a good example. Under this FTA, signed in 2010, although Article 10.67 provided that goods in customs transit, transshipment (both within the broader meaning of transit) and placement within a free zone are subject to border measures, the CJEU still made the landmark opinion in the “Philips/Nokia” case that mere transit goods should not be determined under EU law as infringing as such and are subject to customs inspection only when there are indications that they are actually being diverted to the EU market. Subsequently, the revised 2015 Recast Trademark Directive again confirmed the special exemption of in-transit goods from the scope of trademark rights and border measures, albeit under certain procedural conditions of proof. Apparently, the existence of border measures 40

See supra note 16, China-Korea FTA, Article 15.26.

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for goods in transit in the EU-Korea FTA does not in any way change the EU’s legal position that in-transit goods will be treated as a definite special occasion for border measures compared with import or export. However, in-transit goods are subject to such measures only if there are indications that they are actually intended for the EU market. Considering the EU practices in this regard, the recent border measures in the China-Korea FTA should be understood in the same way, with an effect of generally putting in-transit goods or goods in FTZs under customs supervision while leaving room for special treatment of them under domestic laws, taking into account territoriality and the special features of such goods compared with import and export. Relevantly, both articles stipulating such border measures in the China-Korea FTA specifically provide that such measures are “subject to the provisions of domestic legislation”. Therefore, though it seems predictable that China will finally modify its IP Customs Protection Regulation to add transit under the scope of supervision, it does not guarantee that such amendments would adopt border measures against goods in transit under no special conditions. Based on China’s previous positions regarding in-transit goods between the EU and India, it is more likely that the amended customs IP protection measures would take an approach similar to that of the EU, suspending goods in transit that possibly infringe on IP protected in China when there is an indication or prima facie evidence that they are actually intended to enter the Chinese market.

3.3 Parallel Importation Parallel importation generally refers to the imports of genuine products imported into a country by unauthorized third-party importers after the first authorized sale of those products by the IP holders abroad.41 These are also referred to as gray market goods, as they are usually goods legally authorized in a foreign market, but their importation is under the question of whether it may be prohibited by the same IPR holder (or its authorization chain) in the importing country. According to the main IP laws of patent, trademark and copyright, the IPR holder’s right to control the sale or use of the goods embodying the IPRs is usually exhausted by the first legal sale or placement on the market of the goods. After the exhaustion of IPRs, the purchaser or transferee of the goods is entitled to use and dispose of the tangible object without further need to obtain authorization for production (for patents) or distribution (for trademarks or copyrights). As a basic principle of IP laws, the doctrine of exhaustion addresses the point at which the IPR holder’s control over the goods ceases. In the international trade context, this doctrine plays a key role in balancing free trade that benefits consumers and strong protection for IPR holders’ control over the marketing and pricing of their goods. 41 Ghosh S, Calboli I, Exhausting Intellectual Property Rights: A Comparative Law and Policy Analysis, Cambridge University Press, 2018, pp. 41–64.

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Decisions about the legality of goods under parallel importation differ not only between jurisdictions but also between different IP subjects even within a single jurisdiction, making it necessary to distinguish patents, trademarks and copyrights in this regard.

3.3.1

International Context

Normally, the doctrine of exhaustion together with the principle of territoriality are used to decide the legal status of parallel importation. Generally, there are two different types of parallel importation policies based on different understandings and levels of territorial restrictions on exhaustion. National/regional exhaustion means IPRs are exhausted only within the territory of the country or region (as a jurisdiction) where the first sale happened and thus does not have an effect on IPRs in the nation of importation. According to this policy, parallel importation is not allowed. International exhaustion means IPRs in the nation of importation are extinguished when a good is first sold anywhere in the world and thus allows parallel importation from any country. Similar to its not addressing goods in transit, the TRIPS Agreement provides that nothing in it shall be used to address the issue of the exhaustion of intellectual property rights and thus leaves the flexibility to decide the legality of parallel importation to its members.42 The Doha Declaration on the TRIPS Agreement and Public Health clarified that “the effect of the provisions in the TRIPS Agreement that are relevant to the exhaustion of intellectual property rights is to leave each Member free to establish its own regime for such exhaustion without challenge”.43 Accordingly, there is no consensus on the issue of parallel importation between different jurisdictions, and representative jurisdictions such as the U.S. have even radically changed their own approaches in this regard. Generally, national exhaustion appears to be more conservative in the current globalized world. Regional exhaustion is the rule that is currently established in the European Union (as extended to the European Economic Area (EEA)) and the Organization Africaine pour la Propriete Intellectuelle (OAPI),44 while international exhaustion is increasingly spreading among more countries. In the EU, the regional exhaustion principle is established for goods protected by either copyright or trademark sold or marketed for the first time in the EU that can be freely traded between member states. Article 4 (2) of the Information Society Copyright Directive stipulates that the distribution right may be exhausted where the first sale or other transfer of ownership of an object in respect of the original or copies of

42

TRIPS Agreement, Art. 6. Paragraph 5(d) of the Doha Declaration on the TRIPS Agreement and Public Health. 44 See Calboli I, Intellectual Property Exhaustion and Parallel Imports of Pharmaceuticals: A Comparative and Critical Review, in Correa, C.M., Hilty, R.M. (eds.), Access to Medicines and Vaccines, Springer, Cham, 2022, pp. 31–71. 43

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the work is made by or consented to by the right holder “in the Community”,45 while Article 15 of the 2015 Recast Trademark Directive directly provides EU regional exhaustion of trademarks, subject to an important exception that the trademark holder has legitimate reasons to oppose further commercialization involving changing or impairing the condition of the goods. For patents, Articles 34 and 36 of the Treaty on the Functioning of the European Union (TFEU) provide a legal basis for the exhaustion of patented goods within the EU, and the two provisions apply irrespective of possible contractual limitations against the further distribution of patented products. On the other hand, the copyright, patent or trademark holder can oppose parallel importation where goods enter the market for the first time outside the EU. Thus, international exhaustion may be said to apply between EU members, while it is not applicable to non-EU/EEA members in this regard. Moreover, the EU’s approach to parallel importation in its substantive laws is further reflected in its customs enforcement system. Article 1.5 of the EU IPRs Customs Enforcement Regulation provides that the regulation shall not apply to goods that have been manufactured with the consent of the rights holder with respect to all kinds of IPRs covered by the regulation. In the U.S., international exhaustion gradually gained ground and was finally established in the parallel importation of goods protected by patents. Similar to the laws of some other countries, the U.S. Patent Act does not elaborate on the geographical extent of exhaustion, and several older decisions by U.S. courts, especially the Court of Appeals for the Federal Circuit (CAFC), have taken the position that the sale of an article in a foreign country does not exhaust a U.S. patent. Nevertheless, the 2017 Supreme Court decision in Impression Products v. Lexmark reversed the CAFC standard and stated that the first sale of products anywhere in the world also exhausted the patent rights in the U.S., though the Court did not exclude the possibility that contractual restrictions could prevent the import of gray market goods after this decision.46 This is in sharp contrast to the EU’s position, which generally does not permit contractual limitations for parallel imports. With respect to goods protected by copyright, the U.S. also experienced a sharp shift, when its Supreme Court ruled in Kirtsaeng v. John Wiley and Sons that the exhaustion provision in the Copyright Act means international exhaustion,47 reversing the previous standard upheld by the majority of courts that copyright law prescribes national copyright exhaustion. However, for trademarked goods, the U.S. has been generally consistent and stable with a general principle of international exhaustion, with an exception when the goods are “materially different” in quality. Canada takes a position very similar to that of the U.S. with respect to both patents and trademarks, permitting the parallel importation of patented goods while not

45

Directive 2001/29/EC of The European Parliament and of The Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society, Art. 4 (2). 46 Impression Products, Inc. v. Lexmark Int’l, Inc., 581 U.S. 1523 (2017). 47 Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1358 (2013).

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excluding possible restrictions in the contract and permitting the parallel importation of trademarked goods. Most countries in Asia and Latin America follow the principle of international exhaustion for patents and, similarly, for trademarks. In addition, India, Korea, Singapore and many other countries, including China, allow international exhaustion for trademarks (allowing parallel importation for trademarked goods) on the condition that the quality or technical standards of such goods are not different or damaged; trademark holders may oppose the parallel imports of such goods if this condition is not met. This is similar to the EU’s approach in its 2015 Recast Trademark Directive, while the CJEU takes a lenient position in deciding the quality differences of goods involving repackaging and so on.48 In summary, for patents and trademarks, there is an international trend of admitting international exhaustion and permitting parallel importation, with the exception of trademarks when there is a possible adverse effect on the quality or technical standards of the goods, especially special goods such as pharmaceuticals. However, for goods under copyright, the issue is slightly more complex, and there are fewer practices and cases in this regard in some countries. Interestingly, Australia takes the international exhaustion standard for trademarked goods but national exhaustion for copyrighted goods,49 which may to some extent reflect such complexity.

3.3.2

China

As a universal principle of IP laws, national exhaustion has been widely accepted in the legal systems of not only patents but also trademarks and copyrights. For patents, exhaustion has been written into the statute since its early stage. In 1984, exhaustion was acknowledged by the first Patent Law of the PRC, and Article 62 provided that the “use or sale of patented products manufactured by the patentee or under his authorization after it was sold” should not be deemed an infringement of a patent right. Later, international exhaustion was first made clear and then stipulated in patent legislation. Against the background and influence of the Doha Declaration on the TRIPS Agreement and Public Health, which raised concerns about the interests of developing countries regarding parallel imports of pharmaceuticals, China amended its patent law to allow parallel importation in this regard. In China’s 2008 Patent Law, the previous national exhaustion clause was amended, and the new article 69 takes an international exhaustion approach that exempts “importation of any patented products or products directly obtained under the patented process after the said product is sold by the patentee or by its licensed entity or individual” from patent infringement. This is the only IP legislation to date in China that manifestly establishes international exhaustion in a statute and thus allows parallel importation without reservation such as those imposed by the 48 49

See supra note 44. See ibid.

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U.S. and Canada that embrace certain exceptions to parallel imports through express contractual limitations. However, the parallel importation or relevant exhaustion rules are still unclear in China’s legislation for copyright or trademark, though there have been plenty of judicial decisions in the field of trademark. For copyright, not only is the most recent 2020 Copyright Law silent about exhaustion, it is also very difficult to determine the judicial position from the very limited number of exhaustion cases related to copyright. One of the few decisions on copyright exhaustion is in the dispute between Shanghai Shanjun Industry Co., Ltd. and Shanghai Jiliang Software Co., Ltd. made by the Shanghai High People’s Court, which applied the principle of exhaustion in the field of copyright infringement domestically.50 In this case, the Shanghai High Court confirmed that after the first sale of the original copy or a legal authorized reproduction of a copyrighted work, the copyright holder had no right to control the reselling of the particular original copy or reproduction, despite his or her right of distribution. It also confirmed the legal purchaser’s right to resell the tangible copy without the consent of the copyright holder. Nevertheless, there are still no judicial practices related to the parallel importation of copyrighted goods in China. The only case that is possibly and partially relevant is Hong Kong Pacific Unidata Co., Ltd. and Beijing Jingyan Electric Co., Ltd. v. Guangzhou Avon Cosmetic Products Co., Ltd. According to the agreement for the copyright of the Unidata software between American Unidata Company (UI), Hong Kong Pacific Unidata (PU) owned the copyright in mainland China, Hong Kong and Taiwan, while American UI owned the copyright in all other locations. In 1995, Guangzhou Avon Cosmetic Products Co., Ltd. (Avon) bought the Unidata software from American UI and installed it on its computer networks in China. PU then accused the defendant, Guangzhou Avon, of infringing on its copyright to the Unidata software in China. The Guangdong High People’s Court held that the defendant’s unauthorized use of the Unidata software constituted an infringement of PU’s copyright. However, after appeal, the Supreme People’s Court revoked the judgment of the Guangdong High People’s Court on the basis of unclear facts and remanded the case to the Guangdong High Court. During the retrial, the case was finally settled through negotiation outside the court.51 Unfortunately, none of the judicial decisions in the case mentioned the issue of copyright parallel importation. For trademarks, judicial practices related to parallel importation may be more fruitful, and relevant rules are more evident, though the most recent 2019 Trademark Law does not include any exhaustion clause. The cases regarding the parallel importation of trademarked goods developed vigorously in line with China’s efforts to build more FTZs, and relevant decisions changed during the early period while shaping a more stable dichotomous standard depending on whether the quality or technical standards of trademarked goods were damaged, as in the EU approach. 50

Shanghai Shanjun Industry Co., Ltd. v. Shanghai Jiliang Software Co., Ltd., Shanghai High Court, App. Civil Decision No. 26, 2008. 51 See Ou Yang Ming Qi, Introduction of Avon v. Unidata et al., People’s Court Daily, Page 3, July 27, 2019.

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The first parallel importation case in China was the Lux Soap case.52 In May 1999, a Guangzhou company declared at Guangzhou Fushan Customs an intent to import 895 boxes of Thailand-made genuine Lux soap. Shanghai Unilever, the exclusive licensee of the “Lux” trademark in China, filed a lawsuit before the Guangzhou Intermediate People’s Court on the grounds of trademark infringement. In this early case, the court ruled that the defendant had committed trademark infringement mainly based on a general infringement clause. The decision included a slight mention of the issue of parallel importation but denied the defendant’s international exhaustion defense on the grounds of lack of sufficient evidence.53 The issue of trademark parallel importation was formally analyzed by the Changsha Intermediate Court in the Michelin Tire Parallel Importation Case. In response to the Michelin Company’s trademark infringement accusation, the defendant argued that the tires he had bought and sold were genuine Michelin tires manufactured by the plaintiff’s own factory in Japan. Although the goods involved were not counterfeit, the court found that the tires had not been made for sale in the Chinese market (they were intended for the Brazilian market) and the defendant had not obtained Chinese compulsory product certification (“CCC Certification”), a compulsory quality certification for selling industrial products in China. Based on this finding, the court held that uncertified tires might be a potential safety hazard, and sale of them in China without the plaintiff’s authorization might damage the goodwill and reputation of the Michelin trademark, thus constituting trademark infringement not because of confusion but because of “other damages” under the Trademark Law.54 After the Michelin case, the court decision by the Shanghai Second Intermediate People’s Court in the Victoria’s Secret case55 published by the PRC Supreme Court Gazette further clarified trademark parallel importation. The court held that the defendant had imported genuine “Victoria’s Secret” underwear from LBI, the parent company of the plaintiff, which could not cause confusion about the origin of goods among the relevant public and thus did not constitute infringement. In 2014, an important decision by the Tianjin High People’s Court held that wine with the “J. P. CHENET” trademark imported by the defendant had been legally sold by the plaintiff, and the importation would not impair the function of the plaintiff’s trademark in indicating the origin of the goods, the goodwill of the same trademark, or the interest of domestic consumers.56

52

Wu Jianchuang, Parallel Importation in LUX Soap Case, China Intellectual Property News, June 9, 2000. 53 See First Trial Civil Decision of Guangzhou Intermediate Court, No. 82 (1999). 54 Michelin Group v. Tan Guoqiang and Ou Can, First Trial Civil Decision of Changsha Intermediate Court, No. 0073 (2009). 55 The Brand Administration Company of Victoria’s Secrets v. Shanghai Jintian Fasion Company Dispute over Trademark Infringement and Unfair Competition, published in Supreme People’s Court Gazette, Issue 12, 2013. 56 French Wine Store Corporation v. Muti International Trade Company (Tianjin) Dispute over Trademark Infringement, Final Civil Decision of Tianjin High People’s Court, No. 0024 (2013), published in Cases Collections of People’s Courts, Issue 1, 2015.

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With the newer trend represented by these two judgments, courts in China have more frequently been considering international exhaustion in the parallel importation of trademarked goods. In addition to the Tianjin court, high-level courts, such as the High Court of Shanghai city, Zhejiang Province, and the Guangzhou Intellectual Property Court, have confirmed that parallel importation that does not cause confusion or damage the interests of trademark owners does not constitute infringement.57 On the other hand, the norm adopted by the Michelin case still applies. When imported goods involve material differences in technical standards or concern processing, changing, repackaging, or altering the product information of the goods, courts still tend to treat such parallel importation as infringing based on damages to the quality assurance, reputation or other interests of the trademark owners or consumers other than the classic infringement component of confusion. In a case concerning the parallel importation of vodka branded ABSOLUT, the original bar codes on the parallel-imported bottles were removed by the importer, who further affixed a Chinese written label on the product with a translation of the English word “absolute” without authorization. The court gave a favorable decision to the trademark owner on the grounds that the removal of the bar code compromised the integrity of the original product, with potential offense to both consumers and the trademark owner (preventing full traceability of the product, which is key to tracing its origin and distribution channels, as well as the ability to control quality). The court also believed that self-affixing by the importer of the Chinese label allowed consumers to question the origin of the product, which would damage the reputation of the trademark owner.58 Notably, when it concerns goods sold in FTZs, the courts have adopted more flexible and easy standards in favor of trademark parallel importation. In a case where the defendant parallel imported genuine branded bags, such as Prada and MIUMIU, the defendant sold these products in a unified area in a special mall in an FTZ, using self-made ads on billboards or banners in a way other than the typical practices authorized for shops originally selling these products. Although courts in China may normally treat such acts as damaging the quality assurance function of a trademark under general circumstances, the court in this case ruled not only that the parallel importation was legal based on international exhaustion but also that the additional acts of advertising were reasonable considering the special features of wholesale and inside-zone consumption of FTZs.59 Importantly, this court decision also reflects a trend that the act of parallel importation itself may be distinguished from that of further sale and the manner of sale in China. In addition, the absence of clear rules for parallel importation in the field of copyright and flexibility of rules in the field of trademark may also have an impact 57

See Final Civil Decision of Division 3 (IP) of Shanghai High People’s Court, No. 104 (2014), Civil Ruling of Retrial Division of Zhejiang High People’s Court, No. 1714 (2017), Final Civil Decision of Guangzhou Intellectual Property Court, No. 6944 (2019). 58 First Trial Civil Decision (IP) of Suzhou Intermediate People’s Court, No. 0175 (2013). 59 First Trial Civil Decision of Binhai New District People’s Court of Tianjin, No. 1515 (2015).

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on the parallel importation of patented products. IP holders may practically prevent the parallel importation of patented products by claiming copyright or trademark (with further packaging or translation). To reduce the uncertainty and complexity caused by the inconsistency of parallel importation policies in different IP fields, it is suggested that China’s parallel importation policy regarding international exhaustion be unified.60 Some even believe that, considering that China has already adopted international exhaustion in the field of patent, in contrast to common international practices, it might be easy for it to adopt the same policy in the fields of copyright and trademark, which would be consistent with common international practices.61

3.4 Label Processing for Exportation Label processing export, also referred to as original equipment manufacture (OEM), is a business model mainly related to trademark when discussed against the background of IP protection. In this model, an overseas consignor engages a domestic manufacturer to (wholly) manufacture and export products to another country, with the products affixed with a foreign trademark owned by the consignor in the export destination. When the trademark is owned by different entities in the place of departure and the destination of the export, under the different understanding of territoriality, it raises an issue of whether such acts infringe the trademark in the place of departure, without the authorization of the domestic trademark rights holder, when the product is made solely for exportation and there is no sale or marketing in the place of departure.

3.4.1

International Context

In many countries, the right to control exports under IP legislation is not provided in substantive IP laws; rather, they usually regulate exports through customs measures, and many countries confirm the ability of rights holders to prohibit exports through customs enforcement protection. However, under the TRIPS Agreement, adopting customs protection for exports is a voluntary alternative rather than a mandatory obligation for members.62 Thus, different countries have varying practices regarding whether to extend trademark rights to prohibiting export. Generally, countries with higher IP protection levels protect the rights holder by prohibiting exports through customs protection and even substantive trademark law. 60

Fang Shaokun et al., Research Report on the Framework of Basic Law on Intellectual Property, Research Project of SIPO (No. SS13-A-01), June 2014. 61 Thomas Cottier and Pierre Veron ed., Concise International and European IP Law, Wolters Kluwer International, 2011, pp. 24–26. 62 TRIPS Agreement, Art. 51.

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The U.S. and EU, as typical representatives of strong IP protection, both expressly prohibit the export of goods under trademarks protected in their jurisdictions via customs legislation. In the USMCA and FTAs between the U.S. or EU and other countries, such a standard is usually mandatory and thus ensures such protection in those countries. Though abandoned by the U.S. at the last step, the CPTPP also includes such a mandatory requirement. Vietnam, which used to omit such protection for exports in its legislation, is preparing to amend its decree for the administrative protection of industrial property in order to prohibit exports based on trademark after its entry into the CPTPP.63 China has provided such protection for exports in its IP Customs Protection Regulation since the earliest version in 1995. On the surface, it may be asserted that label processing export is just one form of export and should be subject to trademark owners’ right to prohibit such exports if such protection is provided in the customs enforcement or substantive rules of the exporting country. Nevertheless, label processing export may be a special sphere, as in this situation, there is a “legitimate” rights holder in the country of destination (at least under the laws of that country), and there is no sale or other contact with consumers or the public in the country of pure manufacturing. Thus, there is no likelihood of confusion among the relevant public, which is the key element in deciding a trademark infringement. This understanding may be reinforced by the principle of territoriality, which may be interpreted as requiring that the real acts of sale and “use” be decided under the trademark law of the place where the acts indeed occur, or where the protection is claimed (as in Article 5 (2) of the Berne Convention), both pointing to the law of the country of destination rather than the law of the country of pure manufacturing. This special feature of label processing has triggered seemingly endless debates over the issue of deciding infringement, especially in countries with a high concentration of human resources and factories, such as Vietnam, Indonesia, Malaysia and other Asian countries, including China. Of course, such a business model is not popular in the U.S., EU or other developed regions, where labor prices are extremely high and IP protection is strongly in favor of IPR owners, as those regions boast more high technologies and innovations. It may be inferred without much debate that even if certain label processing export acts occur in such countries, their courts are determined and certain enough to decide that such acts are infringing per se simply due to the violation of the rights holder’s right to control export. However, this may not be true in the abovementioned developing countries, especially China, where labor-concentrated industries still play an important role. Taking into account the earlier-analyzed legal issues of lack of confusion as well as the necessary respect for territoriality, it may be fair to say that there is no absolute answer to the debate about infringement by the label processing export; thus, it becomes an issue involving intense policy concerns and interpretive power. Fundamentally, it is caused by the territorial effect of trademarks confirmed by the Paris

63

Vietnam Draft Decree Amending Certain Provisions in Decree No. 99/2013 ND-CP on the Sanctioning of Administrative Violations in Industrial Property.

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Convention and TRIPS Agreement, which incorporated it when one legitimate trademark (by the consignor) in the eyes of one country (destined for export) conflicts with the other legitimate trademark (by the other owner in the country of manufacturing) for the same subject matter in the eyes of another country (departed from and the place of manufacturing). Both have connecting factor related to the act of label processing, while the essential criteria of confusion and independent protection under trademark law complicate the determination of such an issue.

3.4.2

China

China has long been a “world factory”, with label processing export being one of its important industries. Although the government has been promoting the escalation of industries and does not encourage traditional labor-concentrated businesses, such a change takes time, and there are still plenty of such businesses, causing quite a few litigation cases in this regard to date. In the earlier version of the 2001 Trademark Law, Article 52.1 provided that the use of a sign identical or similar to a registered trademark for identical or similar products without the consent of the trademark owner constituted trademark infringement but did not mention the element of confusion. Nor did that law provide any instructions on the term “use”. However, since the 2013 amendment and through the current 2019 Trademark Law, two major changes have been made regarding the criteria of infringement. First, the previous Article 52.1 was modified and divided into 57.1 and 57.2, with the newer 57.2 adding “likelihood of confusion” as a component for infringement in cases other than “double identity”64 and 57.1 remaining an independent paragraph specifically for “double identity”, absent the consideration of confusion. Second, a new Article 48 was added, specifically interpreting the term “use as trademark” as relevant acts “used to indicate the origin of products”. Since almost all of China’s court decisions related to IP issues in label processing are essentially based on the Trademark Law (in its different amended versions over the past decades), along with the development of trademark legislation (including relevant theories), the IP tribunals of courts around China had a persistent debate for more than 20 years about whether label processing for export falls into the category of “use as trademark”, as well as about whether the likelihood of confusion should be officially considered.65 In the earliest stage before 2006, the dominant judicial opinion was that the use of a mark identical or similar to a trademark registered in China without the consent of the trademark owner in China constitutes infringement, regardless of whether the products were manufactured solely for export or whether the ordering party had a registered trademark for the same mark in the country of destination. Under that strict 64

Namely, “identical sign for identical goods or services,” as provided in Article 16 of the TRIPS Agreement, in which this scenario is treated differently as “presumed confusion”. 65 See YANG Hong, Reasonable Path for Determination of OEM Trademark Infringement, Law Science (China), Vol. 478, No. 9, 2021, pp. 120–125.

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interpretation of the 2001 Trademark Law, neither “use as trademark” nor “likelihood of confusion” is a necessary condition for deciding infringement. China’s earliest case of label processing, Nike v. CIDE Sports Ltd., as well as similar cases in Guangdong and Zhejiang Provinces, are typical examples of this rigid methodology.66 On the other hand, despite the previous judgments and especially the absence of confusion criteria in the Trademark Law, courts still differ in how they base their analysis on fundamental principles and jurisprudence under trademark protection and have decided that label processing does not constitute use as trademark (in the situation of double identity), nor does it cause likelihood of confusion (in the situation involving similarity rather than double identity). Such opinions usually hold that the basic function of a trademark is to indicate the origin of products and to prevent confusing and misleading consumers. Since all label-processed products are solely for export and are not sold or circulated in China’s domestic market, neither confusion nor misunderstanding would be caused; thus, the use of the mark is not an act of trademark use in terms of products purely manufactured domestically and does not constitute such “use” under the Trademark Law.67 The appeal decision in the Jolida case issued by the Shanghai High People’s Court in 2009 is a typical example of such an interpretive methodology.68 After that decision, more courts in different regions adopted the norm based on the interpretive effect of “use as trademark”, although the applicable 2001 Trademark Law at that time had not added the Article 48 of the special interpretation about “use as trademark”.69 The Supreme People’s Court of China has also made three decisions about label processing export during different periods and considered trade policy to be an important factor in its reasoning, which only led to more debate and ambiguity. In November 2015, the decision in the PRETUL case delivered by the Supreme People’s Court further applied the norm of “use as trademark” and held that the fundamental function of a trademark is to distinguish the source of products, which can be achieved only through the circulation of products in the market. Since the label-processed products were solely for export and had not been advertised or promoted in China, the mark affixed to the products is only a physical attachment of the sign and not a use as trademark, even though the 2001 Trademark Law applicable then did not articulate such an interpretation.70 In its 2017 decision in the Dongfeng case, the Supreme Court basically adhered to the PRETUL standard, treating use as trademark as one of the key elements for deciding infringement. Furthermore, the court added two more elements in its judgment, namely, whether there is subjective fault (failure of reasonable care) of the defendant and substantial damages to the plaintiff. After confirming that the defendant had inspected the consignor’s trademark certificate in Indonesia, 66

Nike v. CIDE Sports Ltd. (2001, Shenzhen Court), Ruibao v. Yongsheng (2005, Zhejiang High Court), and Hongxin v. Guangzhou Custom (2006, Guangdong High Court). See supra note 65. 67 Huang Hui, Feng Chao, Analysis on OEM Trademark Infringement Issue, 6 Electronics Intellectual Property, 2013. 68 See supra note 65. 69 See ibid. 70 Retrial Civil Decision of the Supreme People’s Court, No. 38 (2014).

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the court was convinced that the defendant had fulfilled its obligation of reasonable care and caused no substantial damages to the plaintiff in China.71 Although it added criteria such as “reasonable care” and “substantial damages” to the norm of use as trademark, the basic rules of this case are still consistent with the PRETUL decision. However, in its most recent 2019 decision in the HONDAKIT case, the Supreme Court not only decided that the label processing in that case constituted infringement but also reversed its precedent standards in the previous two cases. The court emphasized that the use of trademarks is an objective act and shall be deemed “use as trademark” under the 2013 Trademark Law as long as there is potential for it to indicate the origin of the products, which the Court affirmed in the case.72 Setting aside the possibly reasonable outcome of the decision, it is surprising that immediately after the 2013 Trademark Law added a special article interpreting “use” as an act indicating the origin of products and seemingly provided a clear statutory basis supporting the Jolida and PRETUL standard, the Supreme Court instead chose an opposite approach. Moreover, the court stated that in addition to the consumers of the products, the relevant public should include business participants closely related to the chain of commerce, including business providers involved in transportation of the products, as it is possible that the products sold in the country of destination might flow back to China through the e-commerce network. The court was convinced that those possibilities would create contact between the relevant public and the products, bringing about the likelihood of confusion. Importantly, the court did not consider the subjective fault/reasonable care obligation of the OEM company or the substantial damages. The Supreme Court’s HONDAKIT decision, though justifiable in the outcome, as the “HONDA” sign involved is indeed famous enough to require a higher obligation of care, created further confusion and controversy rather than finally settling the decades-long debate. Although its norm for use as trademark is understandable, it might have extremely broadened the scope of “likelihood of confusion”, making it an “all-encompassing” concept. In addition, it omitted the consideration of reasonable care, which is a standard used by itself in the Dongfeng case. This should have been an important criterion, as OEM business involves two parties in two countries, incurring the necessity of analyzing direct and indirect infringement, with the latter involving subjective fault/obligation of reasonable care as key elements. Indeed, the defendant in this case should have been liable for infringement, but possibly based not on likelihood of confusion but on its subjective fault in taking advantage of a well-known trademark in China as well as lacking reasonable care and accordingly committing acts that amounted to contributory infringement of a trademark. Consequently, despite the absolute judicial authority of this judgment by the Supreme People’s Court, some lower courts are still applying different standards similar to

71 72

Retrial Civil Decision of the Supreme People’s Court, No. 339 (2016). Retrial Civil Decision of the Supreme People’s Court, No. 138 (2019).

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previous ones rather than this decision, and scholars are publishing new criticisms of the reasoning and norms of the HONDAKIT judgment even after its delivery.73 Therefore, it is fair to say that it is still too early to treat the HONDAKIT decision as a decision that finally established the standard for label processing export cases in China. The applicable rules and judicial norms still have room for improvement in the future.

4 China’s Legal System Related to IP Protection in FTZs and the Path for Improvement Against the background of FTZs and the bigger picture of international trade, laws governing goods at customs borders are mainly customs legal systems, without excepting issues of IP protection. As was mentioned earlier, the very important feature of FTZs with respect to the application of IP laws is that there is no special legal mechanism for the application of substantive IP laws in FTZs, though there are some specific substantive law issues regarding certain goods that are typically related to FTZs. The relevant rules are generally scattered in IP laws, which were discussed in part III of this chapter, and are not specifically related to the FTZs themselves. Moreover, the customs enforcement or border measures system, as an administrative procedure, is indeed more directly and specifically related to FTZs, as not only an FTZ (or its key area, called the “bonded area” in China) but also the typical relevant goods in transit, under temporary storage or processing, will usually be specifically stipulated in or subject to the customs law system (in the form of goods in bonded areas) and accordingly will have special legal influence on the enforcement of IP protection through customs border measures. Thus, this part will focus on China’s legal system of IP customs protection and its improvement from the perspective of FTZs, particularly the improvement of substantive rules.

4.1 General Features: Broader Scope of China’s FTZs with Their Key Functions Under Customs Law In China, FTZs are termed “pilot free trade zones”, with a broader scope of not only geographical areas but also their functions. For example, China’s first formal FTZ, the “Shanghai Pilot Free Trade Zone”, encompasses seven areas, including not only the Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port Area, and Pudong Airport Comprehensive Bonded Zone but also the Lujiazui Financial Area, Jinqiao Development Subzone, and Zhangjiang High-Tech Subzone. 73

See e.g., Kong Xiangjun, On the Trademark Infringement of Foreign OEM, Tribune of Political Science and Law (China), Vol. 40, No. 3, 2022; Yang Hong, Reasonable Path for Determination of OEM Trademark Infringement, Law Science (China), Vol. 478, No. 9, 2021.

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Among the seven areas, only the first four enjoy exemptions from tariffs and certain trade formalities; the last three are larger areas vested with more economic reform measures but are not special customs areas in the strict sense of the meaning of an FTZ. Thus, only the first four areas with key features of “bonded” duties exemptions and formalities simplifications are FTZs in a narrow sense, while the last three are only China’s “pilot” FTZs in a broader sense, with more extensive applicable economic reform policies, such as investment promotion and incorporation expediating measures. This distinction between pilot FTZs under China’s special broader meaning and FTZs in a narrow sense also applies to most other FTZs in China. Despite the broader scope of China’s pilot FTZs, the key features and main basis of this mechanism is still the customs legal system. Accordingly, similar to FTZs in other jurisdictions, the legal status of FTZs in China needs to be understood mainly on the basis of its status under China’s customs legal system. Under China’s 2021 Customs Law and its implementing regulations, there are no provisions or terms for a “free trade zone”. However, there are provisions for the “special customs supervision area”, especially the “bonded area”, which correspond exactly to the typical concept and functions of FTZs internationally and thus constitute the key areas of China’s FTZs with the key functions of exemption from duties and simplification of formalities. According to the Customs Law and its relevant implementing regulations, special customs supervision areas, including bonded areas, are still treated as within China’s territory, but bonded goods (including goods under temporary storage or processing for export) and goods in mere transit/transshipment in such areas will generally enjoy exemptions from tariffs and duties for import and export while they stay in those bonded areas or are exported outside the territory.74 In this chapter, such special customs supervision areas in China’s FTZs are the legally meaningful FTZs in the trade context in China, and the discussion of IP issues will be focused on such FTZs in a narrow and strict sense, while in the broader meaning, FTZs in China’s special context will be termed “pilot FTZs”. For the 21 pilot FTZs in China, there are usually a “General Plan” and “Enhanced Reform Plan”, both issued by China’s state government. In the plan for each pilot FTZ, there is usually a special provision authorizing the trade simplification policy mode of “Released measures for Line One and Effective Control for Line Two”. Based on the legal system of special customs supervision areas, “Line One” refers to the circulation of goods between FTZs and foreign territories, and “Line Two” refers to the circulation of goods between FTZs and the domestic market. Therefore, the special status of FTZs under the 2021 Customs Law, particularly the special exemptions for bonded goods (including goods under temporary storage or processing) and goods in mere transit in China’s FTZs, indicates that IP protection through customs enforcement (border measures) is indeed more directly relevant to and more special for FTZs compared with the universal application of substantive laws in such zones. The exemptions from duties, simplification of formalities, and 74

See Administrative Measures for Customs Comprehensive Bonded Areas of People’s Republic of China, Decree No. [2022] 256 of General Administration of Customs, PR. China, issued in January, 2022.

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greater consideration of goods with destinations outside the territory or under “Line One” will inevitably lead to more special concerns and even measures in IP customs enforcement/protection.

4.2 Status Quo of China’s IP Protection Through the Customs Enforcement Legal System from the Perspective of FTZs In China’s Trademark Law and Copyright Law, there is no substantive right to prevent the import, export or transit of goods, while the Patent Law provides a substantive right of import but no right to prevent export or transit. IPR holders’ control of imports and exports is realized mainly through China’s IP enforcement by the customs. As the legal basis of IP protection through customs enforcement, China’s Customs Law stipulates the basic provision in this regard, providing that Customs shall, in accordance with laws and state regulations, protect IPRs related to goods entering or leaving the territory of the PRC.75 China has issued a Regulation on Customs Protection of Intellectual Property (IP Customs Protection Regulation), which has been the implementing state regulation in this regard since 1995 and was most recently amended in 2018. Nevertheless, the IP Customs Protection Regulation provides that customs protection applies to IPRs related to the “import and export” of goods (rather than “entering or leaving the territory”), and imports and exports that infringe IPRs are prohibited. Moreover, the IP Customs Protection Regulation says nothing about its coverage of FTZs or their main equivalent, special customs supervision areas, or about goods under special procedures and typically related to FTZs as goods in transit under temporary storage. The difference in wording between the Customs Law and the IP Customs Protection Regulation leaves room for different understandings with more reliance on one or the other, since the Customs Law has a higher-level application, while the Regulation is the source of the state regulation to be “in accordance with” the law, as required by the Custom Law itself. Some customs officers argue that China’s customs department has the authority to apply IP protection measures to all “goods entering or leaving the territory” except “goods in transit”, which means that bonded goods and goods in FTZs may fall within the scope of IP enforcement border measures.76 Some scholars also believe that “the bonded goods to be reshipped out of the territory are treated as import and export goods”.77 75

Customs Law of People’s Republic of China, amended in 2021, para. 1, Art. 44. According to Zheng Jugang, spokesman and deputy director of the Shanghai Customs Office; see “First IP infringing inward goods were seized by customs in Shanghai Free Trade Pilot Zone”, http://shanghai.customs.gov.cn/publish/portal27/tab61724/info737737.htm, visited on October 30, 2018. 77 Zhang Naigen, Enforcement of intellectual property rights in Special Customs Surveillance Zones of China, Research Papers from the 2013 WIPO-WTO Colloquium for Teachers of Intellectual 76

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Hence, to clarify the scope of application of IP customs protection and to more accurately interpret the meaning of “import” and “export” under the Regulation, it is necessary to examine the Customs Law as the legal basis of this system, especially its provisions for the relevant definitions of import, export, bonded areas and goods as the context of the IP protection provision in its Article 44.1 as well as the Regulation. Article 100 of China’s Customs Law provides definitions of several key relevant concepts. First, Paragraph 3 of this article defines goods in transit, which in this law is referred to as “in-land transit, transshipment and mere passage”.78 The three specific types of transit correspond approximately to the most general and broad meaning of “transit” defined by Article V.1 of the GATT, excluding bonded goods under temporary storage or processing.79 Second, closely related to goods in transit is another type of goods called “bonded goods”, which is defined by Paragraph 5 as goods entering the territory for temporary storage, processing or assembling and approved by customs as temporarily exempt from duties payment until finally being re-transported out of the territory. Bonded goods are in essence similar to goods in transit to the extent that they stay only under temporarily in the geographical territory and are placed/stored outside the customs border (outside as Line One and inside as Line Two) but within special areas of the territory (bonded areas, etc.), usually a key part of a pilot FTZ. Third, Paragraph 4 identifies the concept of “goods under Customs Supervision”, which covers “goods of import or export”, “goods under inland transit, transshipment and mere passage” (goods in transit), “goods enjoying specific duty reduction and exemption”, “goods of temporary import and export”, “bonded goods” and “other goods entering or leaving the territory for which Customs formalities have not been completed”. When the above provisions are examined comprehensively, several important observations may be made. First, it is apparent that the scope of “goods entering or leaving the territory” is larger than import and export and may further include goods in transit and bonded goods. Furthermore, China’s “goods in transit” and “bonded goods” are both distinct from goods of import or export. Last but not least, China’s “goods in transit” are different from “bonded goods”, although they share certain common features. They are different in that goods in transit shall not be processed, assembled or intervened in any way and even shall not be stored beyond a certain limited period, while bonded goods are given such a position precisely for the purposes of being processed, assembled or stored. In addition, China’s goods in transit are certain to leave the territory again, while bonded goods may be changed to another status and become imported goods. Their common features are that their stay Property Law, Compiled by the WIPO Academy and the WTO Intellectual Property Division, 2013, p. 8. 78 China’s customs law divides the most general and broad concept of transit into three specific occasions based on the criteria of whether transit goods have utilized land transport for transit (inland passage), or whether the means of transport change without entering a land border (transshipment). 79 The broad and inclusive meaning of transit identified by the GATT is followed by this chapter unless otherwise stated under specific circumstances, and goods in transit in this broad sense generally covers China’s “goods in transit” (inland transit, transshipment, and mere passage) as well as its “bonded goods”.

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within China’s territory is generally both temporary (with the exception that bonded goods may be changed to imported goods) and both enjoy absence or exemption from duties (which may be temporary for bonded goods depending on their final status). Therefore, we may infer that according to Article 44.1 of the Customs Law, IP customs protection applies to not only import and export but also a broader scope of goods “entering or leaving the territory”, especially goods in transit and bonded goods. However, as the exact implementing regulation designated by the law, the IP Customs Protection Regulation makes clear that its application is only to import and export, this might practically prevent the feasibility of customs border measures applied to goods in transit and bonded goods. Regarding this contradiction between theoretical possibility and reality, there is an academic opinion that “while China’s Customs does enforce IPRs in Special Customs Supervision Zones, no cases are available for the public yet.”80 Notably, the previously mentioned China-Korea FTA clearly added goods under “transshipment”, “free zone” or “bonded warehouse” as objects of border measures, and the recently concluded Sino-US Economic and Trade Agreement also requires that China increase customs enforcement against counterfeit and pirated goods that are exported or in transit.81 As mentioned earlier, this might be interpreted as emphasizing that such goods are generally under customs supervision, while there is still room for specific and even differential border measures for them, as in the EU practices of differential treatment for such goods coexisting with the provisions of the EU-Korea FTA similar to that of the China-Korea FTA. The fact that neither the term “transit” nor “transshipment” used in China-Korea FTA includes a comprehensive and accurate list of those goods of “in-land transit, transshipment and mere passage” under China’s Customs Law might add to persuasiveness of the above observation. Additionally, China’s IP Customs Protection Regulation has not been amended accordingly, nor have any customs enforcement actions for goods in transit or bonded goods seemingly occurred until now.

4.3 Path of Improvement for China’s Relevant Legal System The establishment of FTZs around the world has a certain shared objective and functions of facilitating the smooth flow of goods and simplifying customs measures to promote free trade. This definitely calls for freer regulation with respect to goods in or related to FTZs, requiring more lenient and simplified customs measures, including IP customs enforcement measures. On the other hand, IP protection as a whole allows no compromises unless it is seriously against the public interest, and this is

80

See supra note 77. Economic and Trade Agreement between the Government of the People’s Republic of China and the Government of the United States of America, January 2020, Art. 1.21.

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especially true in China, which has been persistently strengthening IP protection in recent decades to encourage the investment environment. While the strengthening of IP protection requires enhanced customs enforcement of IPRs, the development of FTZs indeed needs more lenient regulation of special goods in more fluent cross-border trade, especially considering that IPRs are protected territorially. The two opposing values create great challenges for the legal system of IP protection through customs enforcement but must be faced and solved. An appropriately designed IP customs enforcement system must balance and coordinate the two coexisting interests.

4.3.1

Coverage

The conflicts between the Customs Law and the IP Customs Protection Regulation regarding objects of IP customs measures have created uncertainty over coverage. The law with a higher application ranking cannot automatically solve such contradiction, as it provides only general principles, while the implementing rules can be found only in the Regulation, which covers only import and export. The addition of “transit”, “transshipment” or “free zones” to the China-Korea FTA and Sino-Us Trade Agreement, with their incompatibility in wording with terms used by China’s Customs Law, only adds to the ambiguity and contradiction rather than the final solution, as is evidenced by the continuous absence of relevant actual practices related to customs measures for such goods. Considering relevant legislation and practices in the international context, though such goods typically related to FTZs as goods in transit, under parallel importation or label processing for export and other bonded goods may have special features and ask for less control owing to efforts to respect and promote international trade, they should at least be under supervision in the field of IP customs protection. This does not mean that they should be prohibited or treated in the same way as goods of general import or export with respect to infringement of IPRs protected in China. On the contrary, the final mandatory measures should be taken with great caution and in principle should avoid intervention with such goods if they indeed will not enter China’s market. However, they need to be generally within the coverage of the legal system of IP customs protection to ensure surveillance and inspection to prevent possible diversion into China’s market under the guise of transit or counterfeit acts under the guise of parallel import or label processing export. Clear coverage of such goods beyond import and export is also necessary for implementing the China-Korea FTA and Sino-US Trade Agreement. As China is a member of the WTO, and thus is bound by most-favored-nation (MFN) treatment in the TRIPS Agreement, there will be a diffusing effect of obligations in FTAs concluded by China. The reason is that even if China implements such FTAs only in domestic legislation, it is nonetheless obligated by the TRIPS Agreement to provide such standards at the same level as that of those FTAs to all other WTO members. This will require such standards to be wholly reflected in China’s legislation toward all WTO members, not only for the two FTA parties themselves.

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Thus, it is important for China to amend its current 2018 IP Customs Protection Regulation and clearly provide in it that customs protection applies to all goods entering or leaving the territory of China in total conformity with Article 44.1 of the Customs Law. Of course, once the coverage is made clear, specific border measures still need to be differentiated according to different statuses of goods.

4.3.2

Differentiated Measures Toward Goods with Different Statuses

For the customs legal system, which is more related to FTZs and the goods within them compared with substantive laws, such customs requirements and measures are essentially targeted at and applied to goods rather than the place where they stay. Classical customs measures, such as tariffs, duties or documentation formalities, are all applied to goods according to the procedures or status they are subject to rather than to the FTZs or non-FTZ areas where they are located. For example, goods in China’s bonded areas are not all bonded goods, and some goods might finally enter customs borders under the import procedure. For such goods, it is only when they are in the bonded areas that they enjoy temporary exemption from duties, and the measures they are finally subject to are different from those that apply to bonded goods. This important characteristic of applying customs measures should also be reflected in IP customs protection/enforcement measures in FTZs. It is the (status of) goods in or related to FTZs that ultimately decide the measures that are necessary and just for them. Subject to the previously mentioned basic principle that all types of goods entering or leaving the territory in FTZs should be subject to the general supervision of IP customs enforcement, the specific measures for goods with different statuses, especially those typically related to FTZs, should be differentiated. Considering the fundamental objective and functions of FTZs to facilitate free trade and simplify supervision measures, those goods closely related to the functions of FTZs should be treated differently from common goods with as little intervention as possible, particularly respecting the territoriality of IP protection for those goods that are destined to be sent abroad and will not finally enter and influence China’s market as well as the protected IPRs. The special features of goods typically related to FTZs are rooted in their relation with the special functions of FTZs and should indeed be reflected in IP customs protection measures, as this enforcement system affects trade in a more direct and compulsory way. It may cause the immediate suspension and even forfeiture or destruction of goods and thus should be used very carefully concerning goods involving territoriality based on independent IPRs in different jurisdictions. As a premise of the differentiated measures, IP customs enforcement measures may be divided into at least three types with increasing degrees of mandatory force, namely, inspection, detainment, and forfeiture or destruction. As a realization of the bottom line that all goods should be covered by general supervision, all goods

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involving possibility of entering or leaving the territory should be subject to inspection by customs authorities to ascertain whether there are risks of IP infringement requiring forcible measures. If risks of infringement indeed exist, then from this stage, those further measures with more force and intervention should be implemented in a differentiated way. It is apparent that goods of general import and export are under the most comprehensive and strict universal enforcement measures, and those bonded goods involving normal processing or assembling (excluding label processing) should be treated in the same way as goods of general import and export. More relevant to this chapter, those previously analyzed goods typically related to FTZs first need to be distinguished from goods of general import and export. Moreover, these special goods should be further classified in several groups corresponding to further differentiated measures. In the context of China’s legal system, such goods typically related to FTZs may be categorized in two groups: first, China’s goods in transit and bonded goods involving temporary warehousing/storage and second, goods of parallel importation and goods of label processing or assembling export (including bonded goods with such a feature). It is recommended that the future amendment of the IP Customs Protection Regulation adopt differentiated measures in the following pathway. The first group of special goods shares the feature of de minimis contact with China’s territory. China’s goods in transit merely physically pass through the territory without any substantial activities of physical change in the territory or final entry into the market. Bonded goods involving temporary warehousing/storage are similar. Thus, the approach by the CJEU to goods in transit should be referred to, with less burden of proof for traders than that required by the EU 2015 Recast Trademark Directive. Under the condition that such goods are subject to inspection by customs, unless the IPR holder submits prima facie evidence or customs has sufficient information to reasonably doubt that goods bearing infringing elements are actually intended to be directed into China’s market, no forcible measures of detainment, forfeiture or destruction shall be taken. Only if such evidence is obtained by customs may they may detain such goods and wait for the court’s decision that infringement as well as direction into China’s market exists so that the court may order forfeiture or destruction. The second group of special goods has more relevant contact with China’s territory, as they involve the form of import or substantial activity of processing/assembling. However, they both have a certain justification of noninfringement based on international exhaustion and territoriality together with foreign legitimate rights. Balancing those two opposing interests and taking into account China’s special history and judicial practices regarding label processing export, border measures for such goods should be slightly stricter than those for the first group, mainly with respect to the burden of proof. Thus, customs may take measures to not only inspect but also detain the goods if IPR holders submit prima facie evidence or customs has any doubt that such goods may infringe protected IPRs in China. However, if the trader provides prima facie evidence that the goods are under parallel importation that can be traced back to the IPR owner or its authorization chain or that the goods are under label processing with legitimate authorization of the rights holder in the country of

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destination, and are to be exported/reexported (in the case of bonded goods) to that country, then detainment should be revoked. Only when the trader cannot provide such evidence may the customs sustain the detainment of the goods and ask the IPR holders to submit the dispute to the court for determination of infringement and ordering of forfeiture or destruction. Importantly, there might be a special exception to the previous enforcement system, namely, pirated copyright goods. As a copyright usually has a universal and unique source of authorship worldwide, it is sharply distinguished from trademarks or patents, which often involve independent and parallel rights holders in different jurisdictions. Thus, the reason for trademark label processing or bonded temporary warehousing/storage may not apply to copyright. The special mechanism suggested above paragraphs should not apply to copyright with respect to processing or bonded temporary warehousing/storage, and only goods in mere transit and under parallel importation may resort to special measures for copyright.

4.3.3

Coordination Between Substantive Rules and Customs Enforcement Measures

Goods typically related to FTZs often have a special status, such as transit, parallel importation or label processing export, and customs enforcement measures for such goods need preliminary decisions by customs regarding whether relevant acts constitute IPR infringement, which is a complex and special issue even under the substantive laws considered by the courts. Therefore, it is important that there are clear substantive rules in the legislation or in universally applicable judicial opinions regarding such special goods for customs to consider. Otherwise, lack of coordination between substantive law and customs enforcement measures will cause discrepancies in the standards adopted between customs and the courts, adding to the ambiguity and unpredictability of customs enforcement measures and further impeding the facilitation of the smooth flow of goods. The relevant substantive rules should be added in substantive IP laws of copyright, trademark and patent or relevant judicial interpretation opinions by the Supreme People’s Court of China, taking a position of promoting free trade and enhancing the simplification of regulatory measures. For goods in transit, the current silence in substantive IP laws should be changed, and it should be stipulated in such legislation that goods in transit are not within the scope of IPR holders’ rights unless there is prima facie evidence that they are actually intended for China’s market. For goods under parallel importation, the Copyright Law and Trademark Law should add provisions drawing on the international exhaustion provision existing in China’s Patent Law, allowing such importation with the exception that parallel importation accompanied by acts damaging the quality control or reputation of the trademark or the interests of consumers shall be prohibited. For label processing export, which is a practical challenge with many case precedents, relevant universal rules may be clarified through judicial interpretation opinions from the Supreme Court, allowing

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such special export with the exception that label processing involving malice of the consignor or consignee, or against the bona fide principle, shall be prohibited.

5 Conclusion In FTZs, goods have multiple statuses and are subject to multiple procedures; thus, customs measures should not target an FTZ itself in a fixed and rigid way. While all the goods within FTZs should be under the coverage of IP customs enforcement, those goods typically related to FTZs have special features deeply rooted in the objective and functions of FTZs to promote trade and linked with the fundamental principle of the territoriality of IP protection. The special objective and functions of FTZs need to be better addressed without undermining basic IP protection for IPR holders. Although complex, customs measures for goods in transit, under parallel importation or labeling processing exportation should be distinct from those for general import and export, with further specific differentiated measures for different groups of goods typically related to FTZs. The substantive rules deciding infringement for such goods need to be clarified and unified to fully consider the territoriality and special features of such goods and to provide a solid basis for applicable law used by customs in preliminarily deciding the possibility of infringement. Only through such specific and differentiated measures based on clear substantive rules respecting territoriality can the conflicting values of IP protection and free policy in FTZs be better balanced. In this respect, China’s IP Customs Protection Regulation has not sufficiently taken those special features into account and still leave some rigid measures with vague meanings, while it lacks a basis to cover FTZs. On the other hand, these ambiguity of enforcement standards might lead to hesitation to fully consider the territoriality principle, expand the extraterritorial effects of domestic IP laws and impede the development of FTZs. The legal system needs further reform, and there should be new approaches based on the abovementioned balancing between the two occasionally opposing values of free trade and strong IP protection, to resolve IP enforcement difficulties in FTZs and reduce conflicts between the two values caused by the unilateral application of domestic IP laws in a fixed, one-sided way.

Divergences in WTO E-commerce Negotiations and Promotion Paths Jie Yang and Huiling Lin

Abstract The rapid development of the digital economy has prompted a global demand for e-commerce or digital trade rules and has also made the negotiation and formulation of rules in this field a major issue. Regionally and bilaterally, the digital trade rules dominated by the United States have been expanded through the Trans-Pacific Partnership, and a set of rule templates have been formed through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the United States-Mexico-Canada Agreement. At the level of the WTO multilateral system, the negotiation of e-commerce rules is also an important matter of WTO modernization reform. Based on the proposals of members, a draft of the WTO e-commerce consolidated text was formulated at the end of 2020. Due to differences among members regarding rules such as cross-border data flow, digital platform responsibility and facility localization, a common text is far from being agreed upon. Digital economic activities rely on the internet and information technology and are not bound by physical borders. In view of the importance of digital economic activities to the global economy, in order to smoothly develop digital trade and e-commerce activities, there is a need for an interconnected and integrated rule system. The negotiation of e-commerce rules in the WTO seems to be a hopeful sign. Therefore, to help bring this hope to fruition, this paper will start from the WTO’s consolidated text on e-commerce, combine the proposals of members and the regional and bilateral development of e-commerce and digital trade rules, analyze consensuses and differences among members, and explore a progressive approach, exception clauses, etc. to promote a globally unified, transparent and fair rule framework. Keywords WTO e-commerce negotiation · Rules · Cross-border flow of data · Free trade agreements

Jie Yang is a fellow of the Law & Policy Analysis Department at the Shanghai WTO Affairs Consultation Center; Huiling Lin, PhD, is director of the Law & Policy Analysis Department at the Shanghai WTO Affairs Consultation Center. J. Yang (B) · H. Lin Shanghai WTO Affairs Consultation Center, Shanghai, China e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Zhang and X. Tan (eds.), A Chinese Perspective on WTO Reform, https://doi.org/10.1007/978-981-19-8230-9_4

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1 Introduction The rapid development of internet technology has significantly promoted the development of the data-centric digital economy, which has become the most important field of global economic growth and competition. The coronavirus disease that began in 2019 has accelerated the revolution of the digital economy, from online education to online shopping, and enterprises and consumers have shown a strong tendency toward digitization. The e-commerce share of global retail trade rose from 14% in 2019 to 17% in 2020.1 All parties have fully realized that e-commerce and digital trade represent enormous commercial opportunities and cultural benefits. Thus, a comprehensive, broad-based and forceful international agreement can guarantee the openness of the digital highway. The negotiation of e-commerce has undoubtedly already become the primary topic of new international trade rules and the WTO’s modernization reform. Due to differences between data cross-border rules and data supervision policies, the rules of bilateral free trade agreements and regional free trade agreements appear to differ. The agreements concluded among developed countries embody digital trade rules with relatively high standards, and in the WTO e-commerce negotiations, developed countries have even proposed issues based on their regulations to implement their rules in international e-commerce negotiations. However, due to interest disparity, major WTO members are still experiencing substantial conflict in ecommerce regulation. Therefore, a consensus text for WTO e-commerce negotiations has not yet been achieved.

2 WTO E-commerce Negotiations Progress Review 2.1 The Progress of WTO Electronic Commerce Negotiations In 1998, according to the framework of the WTO’s Electronic Commerce Work Programme, four permanent institutions of the WTO, the Council for Trade in Goods, Council for Trade in Services, Council for Trade-Related Aspects of Intellectual Property Rights, and Committee on Trade and Development, were appointed to spearhead WTO e-commerce issues and were asked to report on progress to the General Council. The Electronic Commerce Work Programme covers extensive issues, including market access, classification issues, customs duties, and intellectual property rights. Pinning down the specific negotiation issues of e-commerce is a major contribution of the Work Programme. Through the Electronic Commerce

1

See Gary Clyde Hufbauer and Megan Hogan, Digital agreements: What’s covered, what’s possible | PIIE, Policy Brief 21–22, October 2021, available at: https://www.piie.com/publications/policybriefs/digital-agreements-whats-covered-whats-possible, 14th December 2021 last visited.

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Work Programme, the (four) institutions submitted the progress report of 12 authorized discussion issues concerning trade in service to the General Council. However, due to a chronic lack of consensus in critical fields, no substantial results have been achieved other than a declaration of tariff-free electronic transmission and its extension. The following table lists the matters that the WTO Electronic Commerce Work Programme authorized councils to discuss, most of which are still current WTO reform issues (Table 1). The Ministerial Decision on the E-commerce Work Programme passed at the Bali Ministerial Conference in 2013 required the Work Programme to track new problems that appeared in e-commerce fields, such as network interconnection, information acquisition, mobile communication, electronic transmission software, and cloud computing. However, it failed to achieve any substantial progress. With the rapid development of e-commerce around the world, the situation of e-commerce negotiation is obviously different than it was in the past. After the Nairobi Ministerial Conference in December 2015, activity and participation in WTO discussions on e-commerce changed rapidly. WTO members have submitted many proposals and discussion documents related to e-commerce; for example, Japan, Singapore, Australia, Canada, the European Union, the United States, China, Russia, Brazil and other members have submitted a large number Table 1 Discussion issues authorized by the WTO E-commerce Work Programme General Council

Continue to review E-commerce Work Programme; consider any trade-related issues

Council for Trade in Services

Scope; protection of privacy, public morals and antifraud; most-favored-nation treatment; transparency; increasing participation of developing members; domestic regulation; competition; market access commitments; telecommunications annexes; national treatment; customs duties; classification issues

Council for Trade in Goods

Market access for e-commerce-related products; e-commerce-related standards issues; rules of origin issues; valuation issues; import license issues; duties and other taxes; classification issues

Council for Trade-Related Aspects of Intellectual Property Rights

Protection and enforcement of copyright and related rights; protection and enforcement of trademarks; access to new technologies

Committee on Trade and Development

Impact on trade and economic prospects of developing members, especially small and medium-sized enterprises; promoting the participation of developing members in e-commerce; integration of developing members into the multilateral system using information technology; possible implications for traditional distribution methods of physical products; financial implications for developing members

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of proposals, showing an obvious contrast with the infrequency of actions after the adoption of the Work Programme. The “Joint Statement on Electronic Commerce” (hereinafter referred to as the “Joint Statement”) issued by 71 countries and regions at the Buenos Aires Ministerial Conference in December 2017 later became an important turning point and ended issue-oriented wrangling by identifying the process of rule negotiation as the goal. It is notable that China joined the “Joint Statement” at the informal ministerial meeting on e-commerce held in Davos, Switzerland, in January 2019. Since then, it has started negotiating e-commerce rules with major members such as the United States, Japan, the European Union, and Russia. In February 2021, the WTO circulated the newly revised consolidated text of the WTO E-commerce Negotiations, summarizing the proposals and propositions of the parties.

2.2 Main Contents of Consolidated Text of WTO E-commerce Negotiations The newly revised consolidated text of the WTO E-commerce Negotiations was circulated by bilaterals.org on 12 February 2021. The text was created on 14 December 2020 and was the documentary basis of WTO e-commerce negotiations in 2021. Since many of the 86 participating parties contributed different proposals, the consolidated text contained words in square brackets throughout its 90 pages of text. The text of the draft is based upon these parties’ proposals, and the drafters pointed out these proposals in the annotations of each article.

2.2.1

The Framework of the Consolidated Text and Its Content

The consolidated text contains six sections and one annex. In general, the content covers all aspects of e-commerce activities, from the conclusion of contracts to the flow of products or services and other related matters. The first section is “Enabling E-commerce”, which mainly covers traditional trade facilitation clauses in the early negotiation stages, including “Facilitating Electronic Transactions” and “Digital Trade Facilitation and Logistics”. These involve the establishment of a legal framework for electronic transactions, the recognition of the validity of electronic signatures and electronic authentication, the recognition of the validity of electronic contracts, the recognition of the validity of electronic invoices, paperless trade and the tariff-free import of small-value imported products. Most members’ proposals also contain these contents, indicating that there is a strong consensus on this section. It is worth mentioning that under the subsection “Facilitating Electronic Transactions”, China proposed rules for “Electronic Payment Services”, which essentially means market access for financial services. This issue is sensitive and may therefore face more controversy.

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The second and third sections are “Openness and E-commerce” and “Trust and E-commerce”, respectively. They involve important issues in the field of the digital economy, such as internet platform liability, flow of information, localization of computing facilities, openness to internet access, personal data protection, source code and other provisions. Various members have proposed many alternative provisions, from which we can see the different positions of members on the same issue. The fourth section is “Cross-cutting Issues”, including the three subsections “Transparency, Domestic Regulation and Cooperation”, “Cybersecurity”, and “Capacity Building”. Although this section also has different positions based on member proposals for the same issue, the divergences are not as broad as they are in the previous two sections. The fifth section is “Telecommunications”. Eleven of the twelve articles are proposed by the European Union, mainly to update the WTO telecommunications service, and China proposed “Network Equipment and Products” in the second subsection, which was not included in the previous e-commerce rules. The sixth section is “Market Access”, including three aspects: service market access, temporary entry and sojourn of e-commerce-related personnel, and goods market access. The last section is the annex, including the preamble, definitions, principles, scope, relation to other agreements, general exceptions, security exception, prudential measures, taxation, dispute settlement and committee on trade-related aspects of e-commerce. Among them are many proposals from members on the scope of application and general exception clauses, which also shows differences between the members.

2.2.2

The Consolidated Text Focuses on Emerging Digital Service Issues

In the long duration of e-commerce negotiations, the range of rules negotiated has also expanded, from the initial traditional tariff exemption for electronic transmission to electronic authentication and electronic signatures, electronic contracts, paperless trade, customs procedures, and online consumer protection. Primary e-commerce provisions have been formed through regional free trade agreements (RTAs). With the development of the digital economy, the demand for rules has gradually shifted from the border to the domestic arena, and terms such as cross-border data flow, location of computing facilities, data access, digital platform liabilities, and privacy protection have emerged. From the content of the consolidated text, in addition to the first section, which applies mainly to the conduct of e-commerce activities, other sections and clauses make rules for the provision of digital services. These rules are reflected in the clauses on access to data and flow and protection of data, which are distributed mainly in the second, third and fourth sections, as well as propositions on digital service market access, which are reflected in the fifth and sixth sections.

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2.3 Summary: Consensuses and Divergences in WTO E-commerce Negotiations 2.3.1

Consensuses

Since the beginning of the WTO e-commerce negotiation, all the participants have gradually reached consensus on the surface-level rules. These include trade facilitation measures, such as electronic signatures and authentication, electronic payment, and paperless trade; consumer protection measures, such as personal information protection; measures to enhance transparency, such as publication of e-commerce measures; digital trade business market access and national treatment; and measures related to cooperation and development, such as technical assistance and capacity building.

2.3.2

Divergences

The WTO e-commerce negotiations are divided into deeper-level rules, focusing on issues such as cross-border data flow rules and exceptions to them, source code, data localization, taxation of digital products or services, cross-border e-commerce facilitation, and responsibility for digital platforms. Therefore, coordinating the positions of all members is the top priority of negotiations. Hence, based on the WTO e-commerce consolidated text (hereinafter referred to as the “text”) and previous proposals by the US, the EU and Japan on WTO e-commerce negotiations, the paper will summarize the different propositions and main divergences of the members, study and predict the greatest common divisor that the major participants in the WTO e-commerce negotiation may reach on the ecommerce clauses, and explore how to achieve a globally unified, transparent and fair rule framework on the basis of the interoperability and integration of data governance.

3 Proposals and Divergences of Members on WTO E-commerce Negotiations 3.1 Cross-Border Data Flow Rules and Exceptions In the consolidated text of WTO e-commerce, the divergences among members on cross-border data flow rules concentrate mainly on Articles 5 and 6, which regulate basic rules of cross-border data flow and exceptions to them. The United States, Taiwan, South Korea and Canada proposed absolutely prohibiting or preventing any impediment to the transfer of information, whether the transferred information is private or otherwise, if the transfer is for the purposes

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of conducting business activity. This proposal requires unconditional cross-border data flow in the manner of a prohibitive norm, takes a firm attitude toward data crossborder protection, and advocates that the pursuit of free trade should be prioritized in digital economic business transactions. A slightly different approach has been taken by Japan, Brazil, Singapore and the United Kingdom in proposing that parties should allow cross-border data flow for the conduct of business. There is no substantial difference between this formulation and the former one except that the wording is “mandatory norm” instead of “prohibitive norm”. The EU proposed narrower restrictions, stating that cross-border data flow shall not be restricted by requirements for data processing in the territory of the party, data localization requirements, prohibitions on data being stored in the territory of other parties, or the use of computing facilities in the territory of the party. The above three formulations essentially require the free flow of cross-border data to promote digital trade, but they reflect different emphases in the expression of the provisions. One focuses on the free flow of cross-border data, and another is providing exceptions to general principles. This is also reflected in Article 6, where members have different opinions on how to construct exceptions to the provisions on the free flow of cross-border data.

3.2 Taxation on Digital Products or Services Regarding the issue of whether a tax is imposed on digital products or services (i.e., a digital services tax), all countries basically hold a unified attitude, which is that they do not wish to impose custom duties on cross-border electronic transmission in general. However, the question of whether a party can impose internal taxes on electronic transmissions is a matter of debate arising mainly from the United States. The US proposes that in general, a party shall not be precluded from imposing internal taxes on electronic transmissions, which include any content transmitted electronically, as long as such taxes are imposed in a manner consistent with existing WTO rules. The US proposal shows that it, as a digital trade powerhouse, has long been resisting countries that try to impose a digital services tax on revenue generated by companies doing business in jurisdictions where they do not have a physical presence. However, 11 other members, including the U.K., Canada and China, want more extensive power than the US proposed. According to the text in square brackets, these 11 members proposed that a party shall not be precluded from imposing internal taxes, fees or other internal charges, including revenues and profits generated from digital trade, indicating that these 11 members have not yet finalized their position on the proposal. In March 2018, the European Commission announced the long-awaited Fair Taxation of the Digital Economy Plan, which includes two separate digital tax legislative proposals. Outside the WTO, members of the OECD Inclusive Framework are also actively promoting negotiations on the reform of the international tax structure. The G20

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finance minister and Central Bank governor issued a joint communiqué in Venice on 9–10 July 2021, approving the key components on profit redistribution and global minimum taxation to address the tax challenges project (BEPS2.0) brought by the digitalization of the economy under the G20 and OECD Base Erosion and Profit Shifting (BEPS) framework. The communiqué clarified new international tax rules and reached a consensus on the distribution of taxing powers: market countries can levy an income tax of more than 20% on the profits of the world’s largest and most profitable multinational companies that exceed 10%. The subject of the next phase of negotiations in the BEPS2.0 project is the redistribution of profits and the coordination of the digital services tax as well as specific parameters pertaining to the global minimum tax. In the development process of digital taxation rules, the formulation of these rules can be roughly divided into two categories: one responds to the development of the digital economy mainly through the specific optimization of the current taxation law system, which means improving or optimizing taxation regulations such as value-added tax, income tax, and international tax law principles related to the digital economy under the framework of existing taxation laws. In the other category, digital tax is established as an independent tax category that is not limited to the existing tax system, combined with the particularity of the digital economy, and the relevant taxation elements are designed independently. However, it is worth noting that countries and international organizations often adopt measures in both categories simultaneously when carrying out taxation reform.

3.3 Facilitation of Cross-Border E-commerce There is a clear consensus among members on promoting cross-border e-commerce facilitation. The consensus is reflected mainly in the needs of all members to promote the facilitation of trade in goods and services in the digital economy era and adapt to the new era. Therefore, there is not much controversy regarding the use of electronic authentication and electronic signatures, electronic invoicing, electronic payment and similar trade methods to promote paperless trade, simplify customs procedures, and ease trade policies. However, a dispute arose over the legal validity of electronic contracts. The EU, Brazil, Ukraine and the UK argued that electronic contracts should have the same legal effect as ordinary written contracts and that the legal effect of electronic contracts cannot be denied just because they are signed electronically. China proposed that if there are no exceptions in the law, the validity of an electronic contract should depend on the will of the signatories. Of course, it also emphasized that electronically signing a contract should not be the only reason for denying the legal effect of the contract, and that the member’s law shall be respected and the legal effect of electronic contracts automatically be recognized if a concluding or performing action used automatic information systems in the territory of the member. China’s

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proposal regarding electronic contracts basically follows the stipulation in the Electronic Commerce Law of the People’s Republic of China, leaving a certain amount of leeway for the application of laws of members, and can exclude the application of electronic contracts through certain exceptions. In addition, Russia proposed that contracts may be concluded by electronic means using electronic signatures as an instrument that guarantees legal effects, and national cryptography instruments should be applied to ensure the validity and integrity of contracts. The text also pioneered proposing to establish a unified window to promote data and system interoperability. Due to the euphemistic wording, these articles did not cause much controversy among the members. Based on Brazil’s proposal, four aspects are stipulated. The first is the interoperability of data, requiring parties to provide a single window for foreign trade to exchange data if practical, including the trade administrative documents, logistics providers, and government departments involved. The second is interoperability within the single window, which requires parties to try their best to allow port authorities, logistics providers, e-commerce platforms and other participants to exchange data with each other within the single window. The third is interoperability between the single windows of parties. The fourth is the guiding document on data interoperability. Members should endeavor to adapt to the World Customs Organization Data Model or other compatible international standards to exchange data in their single windows, decide what kinds of data can and cannot be exchanged, decide what situations are applicable and inapplicable in data exchange, etc. The text uses the word “best efforts” for all four aspects without any mandatory provisions.

3.4 The Liability of Digital Platforms According to the text, the US proposal would exempt “interactive computer service suppliers” (i.e., digital platforms) from liability for content shared on their platforms, as in the contentious Section 230 of its domestic Communications Act of 1934. The proposal states that no party shall adopt or maintain measures that treat a supplier or user of an interactive computer service as an information content provider in determining liability for harms related to information stored, processed, transmitted, distributed, or made available by the service, except for content for which the supplier or user has, in whole or in part, created or developed the information. The proposal also states that no party shall impose liability on a supplier or user of an interactive computer service on account of any action taken by a supplier or user who, based on certain information, considers the service harmful. On this basis, South Korea proposed that providers or users of interactive computer services should fulfill the obligation of prompt notification when intellectual property infringement occurs and strive to stop the infringement. At present, responsibility for such digital platforms is still under discussion.

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4 Development of Electronic Commerce and Digital Trade Rules in Free Trade Agreements and the Impact on WTO E-commerce Negotiations 4.1 E-commerce and Digital Trade Rules of FTAs Digital trade or e-commerce rules in FTAs reveal that three different approaches have formed. The first is the governance approach led by the United States that advocates the free flow of data across borders; the second is the digital trade governance approach with the participation of the European Union and is characterized by privacy protection; the third is a multigovernance approach, of which the RCEP is a typical example, that takes into account the interests of digital trade concerning developed countries and the interests of data security and data industry development concerning developing countries.

4.1.1

A US-Style Approach Centered on the Free Flow of Data

Although the United States finally quit the negotiation of the Trans-Pacific Partnership (TPP) after it introduced digital trade rules that were consistent with its own free market values into the e-commerce chapter of the TPP, in which it had a dominant status, the subsequent FTA basically followed the TPP’s template rules, including the United States-Mexico-Canada Agreement (USMCA) and the US-Japan Digital Trade Agreement. A comparison of the data flow clauses in the digital trade chapter of the FTA signed by the United States shows that the US-style data flow approach has the following two characteristics. (1) Strengthening restrictions on data localization measures Unlike the TPP, the USMCA cancels the provisions that parties can have their own regulatory requirements on the cross-border flow of data and the location of computing facilities and adopts stricter wording to further strengthen support for the free cross-border flow of data. For example, in terms of cross-border data flow, the wording “shall allow” in the TPP is changed to “shall not prohibit or restrict” cross-border data transmission by electronic means in the USMCA. In addition, the USMCA even prohibits the localization of data on financial services. Although it operates according to a set of different rules stipulated in the financial services chapter, these provisions are bound to promote the flow of data in the financial field. (2) Stressing the rules of free flow of personal data The US FTA emphasizes the free flow of personal data, which is reflected in two aspects. For example, in the USMCA, Article 19.8 of the personal data protection clause requires contracting parties to impose restrictions on crossborder transfers of personal data that are commensurate with and proportional

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to the risks presented.2 In addition, when data are transferred across borders electronically for business activities, the original version of TPP Art. 14.11 allows parties applying domestic data protection laws and regulations to justify the restriction of cross-border data flow.3 However, the USMCA removed such content and thus demonstrates that the United States pursued a free flow of data with no restrictions of national laws, stressing its commitment to minimize the impact of individual countries’ personal data protection laws. 4.1.2

European-Style Approach Centered on Privacy Protection

The European Union, as the party that has signed the most free trade agreements in the world, will naturally not ignore the huge impact of the development of digital trade and related rules. In its 2017 Digital Trade Strategy Report, the European Union set out ambitiously to be a standard setter for digital trade. In this context, the EU, in the FTAs that it has signed in recent years, has begun to include provisions on crossborder data flow in the e-commerce chapter, shifting from the conventionally used term “e-commerce” to the term “digital trade” or regulating digital trade in a separate chapter. The EU-Japan Economic Partnership Agreement (EPA) first touched on the cross-border data flow issue. Article 8.81 states that “the parties shall reassess the need to include provisions on the free flow of data in this agreement within three years from the date of entry into force of this agreement”, which is essentially consistent with the EU’s strategy of expanding the global influence of its digital trade rules. For countries, regions, industries or international organizations that meet the EU standards for the free flow of cross-border data, as long as they meet the “adequacy determination” standard of the EU General Data Protection Regulation (GDPR), they can freely transfer data without additional EU authorization or approval. The GDPR implemented by the European Union on May 25, 2018, imposes strict regulations on the protection of personal data and its outbound circulation, so it is closely related to digital trade. On the one hand, the GDPR expands the scope of jurisdiction; even if the data controller does not have a physical presence in the EU, the GDPR is applicable if the data controller collects and processes the data of EU citizens in the process of providing goods or services across borders, which is the so-called long-arm jurisdiction. On the other hand, the GDPR provides outbound data storage and compliance rules. In general, in the FTA, the EU also insists on the protection of personal information as the priority in the cross-border flow of data and implements conditional crossborder data flow rules; that is, the transmission of data must meet strict compliance 2

See USMCA Art. 19.8(3): “The Parties recognize that pursuant to paragraph 2, key principles include: limitation on collection; choice; data quality; purpose specification; use limitation; security safeguards; transparency; individual participation; and accountability. The Parties also recognize the importance of ensuring compliance with measures to protect personal information and ensuring that any restrictions on cross-border flows of personal information are necessary and proportionate to the risks presented.” 3 See TPP Art. 14.11(1): “The Parties recognise that each Party may have its own regulatory requirements concerning the transfer of information by electronic means.”

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conditions, and, through the EU jurisdiction, data security must be safeguarded. However, there is still a great difference from the more thorough US-style approach to free cross-border flow of data.

4.1.3

Multiple Cogovernance Approach Taking RCEP as a Template

The RCEP initiated by ASEAN is slightly different from the US-style approach that focuses on the free flow of data and the European-style approach that focuses on the protection of personal privacy. It is a regional multilateral trade agreement jointly participated in by many developing and developed countries, which is more in line with a multilateral trading system such as the WTO rules. The RCEP takes into account the interests of digital trade concerning developed countries and the interests of data security and data industry development concerning developing countries. While supporting the free flow of data across borders, it states that contracting parties can take localized measures to restrict data flow based on public policy objectives or national security interests and takes into account the interests of countries that are lagging behind in the digital industry, setting a 5–8 year grace period to help them develop local digital enterprises and data distribution frameworks. In general, the RCEP scheme focuses on the safe flow of data.

4.2 High-Quality Digital Trade Rules as Converged by Developed Countries The US and the EU have formed a strong influence through the establishment of bilateral and regional e-commerce and digital trade rules, and a trend of conglomeration of digital trade governance with developed countries as core participants has subsequently formed, which is reflected in the statement of the G7 digital trade rules. Although the US and the EU differ in their approaches to data governance, this trend reflects the willingness of the two main economies to move closer on digital trade governance.

4.2.1

Developed Countries Strengthened the Formulation of Digital Trade Rules

A digital trade group formed by the US, Japan, the EU and other developed countries is constantly trying to implement its digital trade rules on various occasions. The United States is a strong driving force in the field of e-commerce and multilateral economic and trade rules. It has clearly classified the objects of digital trade, making its rules highly operational, and through the conclusion of bilateral or regional free trade agreements, it has gradually replaced “electronic commerce” rules with “digital

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trade” rules. Restricted by the tradition of privacy protection, the FTA signed by the EU in the early stage rarely involves the cross-border flow of data. However, with the introduction of the “digital single market” strategy in 2015, the EU adjusted its position in the field of the digital economy. While maintaining its strict cross-border data flow standards, it hopes to take advantage the development opportunities brought by digital trade through FTAs. Currently, digital trade rules dominated by developed countries are embodied in five trade agreements: Chapter 14 of the Trans-Pacific Partnership (TPP), now incorporated into the 11-country Comprehensive and Progressive Trans-Pacific Partnership (CPTPP); Chapter 19 of the United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) (2019); the US-Japan Digital Trade Agreement, which is very similar to Chapter 19 of the USMCA (2019); Chapter 14 of the amended Singapore-Australia Free Trade Agreement (SAFTA) (2020); and the Digital Economy Partnership Agreement (DEPA) between Singapore, New Zealand and Chile (approved by the first two countries) (2020). Overall, online activities covered by these current digital agreements include cross-border data flow, digital communications, digital identities, artificial intelligence and website access. These agreements, however, allow states to invoke various exceptions (to maintain “public order,” “morality,” and “national security”) to disrupt digital activity. The rules of the five agreements are relatively similar. For example, the text of the US-Japan digital trade agreement is very similar to that of the USMCA, and the CPTPP embodies high-standard digital trade rules. The DEPA allows members to implement the agreement through exceptions to a certain extent, which reflects a certain degree of flexibility.

4.2.2

Strengthening the Impact of Digital Trade Rules Through Joint Declarations

In addition to establishing digital trade rules through FTAs and RTAs, in recent years, developed countries such as the US, Japan and the EU have begun to strengthen their positions on digital trade rules through joint statements. The progress made in the G7 will expand the global influence of their digital trade rules. According to the “G7 Trade Ministers’ Communiqué” and “G7 Trade Ministers’ Digital Trade Principles” released on October 22, 2021, the G7 stated that the principles that will guide G7 digital trade include commitment to open digital trade markets; free flow of trusted data; safeguards for workers, consumers and businesses; digital trade systems; and fairness and inclusive global governance. The G7 also mentioned that efforts to address the digital divide and enhance the capabilities of developing countries should be strengthened. In addition, the G7 specifically mentioned its commitment to promoting the “Joint Statement Initiative on Electronic Commerce” to achieve high standards and possible commercial implications, with the expectation of achieving practical results before the 12th WTO Ministerial Conference.

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The position on digital trade rules of the developed countries represented by the G7 is consistent with the rules in the FTA and RTA that they concurrently signed. The core content involves the free flow of data, data localization requirements, data security, personal data protection, use of government data, digital trade facilitation, source code or encryption key issues, etc., which overlap with the coverage of the WTO consolidated text. Although the details are different, this will help the US, EU, and other developed economies form a consistent position in WTO e-commerce negotiations and expand their influence.

4.3 Impacts on WTO E-commerce Negotiations 4.3.1

Enhancing Members’ Willingness to Participate

According to the statistical data of regional trade agreements, digital trade rules are increasing year by year. As of April 2021, there were 109 RTAs including e-commerce chapters in the world, involving two-thirds of WTO members.4 The large number of RTAs has led more members to realize the importance of the digital economy in the current era and allowed countries with different levels of development to participate in the development of this issue. This can improve members’ understanding of ecommerce negotiations and may encourage more members to accept and participate in WTO e-commerce negotiations. In addition, trade agreements initiated by countries and regions that represent major economies, such as the US, EU and ASEAN, play an important role in promoting regional economic and trade development. With their economic and trade influence, they will attract more countries to participate in trade agreements in the region and integrate into digital economic governance.

4.3.2

Accelerating Consensus Gathering, but Core Differences Still Exist and Are Difficult to Reconcile

The difficulty of negotiating RTAs is lower than that of negotiating multilateral and plurilateral agreements, which enables the coordination of rules to be accelerated. From the perspective of e-commerce and digital trade clauses in regional and bilateral agreements in recent years, in addition to basic contents, such as paperless trade, electronic authentication, electronic signatures and consumer protection, clauses such as data flow, the location of computing facilities and data access have gradually increased. In particular, the United States and Europe have gradually established a digital trade agreement network through trade agreements, and through the platform of the G7, a global digital trade governance group has also been formed. It can be predicted that regional differences will be further reduced. 4

Tang Yang, Wu Yue, Dong Xiaoying, “Development Trend of Global Digital Trade Rules and China’s Basic Countermeasures”, Journal of China Internet, volume 3, pp. 12–17, 2022.

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However, judging from the current governance approaches formed in regional agreements, two of the three approaches, namely, the US and the EU, seek to find a middle ground, but there are still great divergences with China and other developing countries on governance options, such as digital security and digital services taxation. China started to join the CPTPP and DEPA in 2021, but there has been no progress thus far, and it remains to be seen how these divergences will be overcome. In general, in the current context in which the US and other developed countries emphasize likeminded, trusted data flow, as well as the large global digital divide, coordination can be difficult.

5 Countermeasures and Suggestions for WTO E-commerce Negotiations 5.1 Reaching a Preliminary Agreement Based on Common Understanding At present, the content that WTO members can relatively easily agree on in ecommerce negotiations includes e-commerce facilitation, support for cross-border e-commerce of small and medium-sized enterprises, capacity building, consumer and personal information protection, and exemption from customs duties for electronic transmission. Therefore, from the perspective of seeking common ground while reserving differences, members may be able to reach preliminary agreement on the basis of commonality. In terms of divergences, especially on data security, members still have different legislation. Of the 194 United Nations Conference on Trade and Development (UNCTAD) member countries, 137 have enacted data and privacy protection legislation.5 Consumer advocates and legislators are likely to insist on minimum levels of protection in new digital agreements. However, personal data protection standards and enforcement measures vary from country to country, making it difficult to agree on common minimum standards. Currently, the United States and the European Union are trying to reach an agreement on the protection of personal data in transatlantic transfers. Considering the above situation, in the WTO e-commerce negotiation strategy, is it possible not to directly specify the treatment of a certain product or service but to adopt a horizontal trade agreement model to deal with cross-border data issues, including personal data protection? Adopting a horizontal commitment model in the schedule of specific commitments under trade in services may be accomplished through a model of adding annexes to a certain field or industry or including horizontal provisions as part of a digital trade agreement. For the protection of personal data, 5

UNCTAD database, Data Protection and Privacy Legislation Worldwide, available at https://unc tad.org/page/data-protection-and-privacy-legislation-worldwide, 26th April 2022 last visited.

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we can learn from the EU’s differentiated treatment of personal and nonpersonal privacy data. In this way, first, China’s digital trade rules can be in line with US-style cross-border data free flow rules to a certain extent. Of course, this pattern depends on the willingness of the US, Japan and the EU to adjust their positions on certain rules.

5.2 Exception Rules as Means for Achieving Negotiation Objectives E-commerce and digital trade often overlap with government priorities for market regulation and security. To adapt to these priorities, digital agreements tend to draw on the concept of long-standing trade agreements covering goods and services. In this regard, the FTAs of the US, Japan and EU have also adopted exception provisions, including general exceptions, security exceptions and financial prudence exceptions. The current digital trade agreements generally include several standard exceptions: • National security measures, as determined by the parties, can override all other commitments in digital agreements. • Exceptions under Article XIV of the General Agreement on Trade in Services (GATS) to protect public morals; protect human, animal and plant life or health; ensure compliance with laws and regulations; prevent fraud; and protect personal privacy can override other terms in the Digital Agreement. • Neither government procurement nor information held or processed by the government is subject to digital commitments. • Agreements involving investment, trade in services and financial services take precedence over digital commitments when terms conflict. Through the operation of these standard exceptions, WTO members can obtain sufficient “policy space” according to their domestic regulatory situation to reach an agreement. However, these exceptions also means that commitments in digital agreements can be overturned, for example, through broad “safety” exceptions, leading to the risk of the best efforts being ignored. Therefore, whether the digital agreement secures an open digital highway will depend largely on the good behavior of the signatory governments.

5.3 Realizing High-Standard Agreement Through Progressive Opening For now, multiple cogovernance and secure data flow under the RCEP approach may be a milder option for countries that currently use data localization as their primary

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regulatory tool. Without the involvement of the United States and Europe in the negotiation, the digital trade rules under the RCEP can be compatible with China’s domestic data laws and cross-border data transfer regulations and can also take into account the common interests of other developing countries in the region in terms of digital trade, which makes the RCEP a relatively fairer set of digital trade rules for developing countries due to its more flexible regulatory space for their digital economy development. The implementation of cross-border data flow does not have to occur in one step. On the basis of forming basic terms, it is possible to consider adopting a “progressive” path to incorporate rules involving cross-border data flow and to continuously upgrade to achieve common and compatible rules. The three-year review clause in EU FTAs is an example. In addition to provisions on cross-border data flow, provisions on nondiscriminatory treatment of digital products, cooperation on cybersecurity, and cooperation on consumer protection should be gradually incorporated. The openness and integration of the DEPA signed by Singapore, New Zealand and Chile make it a model worthy of reference by WTO members.

Free Pass or Constructive Response? Assessing China’s WTO Performance Yichou Han

Abstract The year 2022 marks the 21st anniversary of China’s accession to the World Trade Organization (WTO). It is a significant milestone for the Chinese economy as the nation continues to promote high-level opening up and takes the lead in upholding and helping build multilateral economic and trade rules. How much WTO obligations constrain China’s state behavior, however, is contested in the Western literature. While China’s remarkably good compliance record is widely acknowledged, some critics have argued that rather than strictly adhering to adverse rulings, China’s efforts to implement WTO decisions amount to paper compliance. For example, China makes use of the remedy gap in the WTO system to lag the implementation of Dispute Settlement Body (DSB) rulings wherever possible. This chapter points out that the criticism is hypocritical because the EU and the U.S. have followed the very same tactics for years, making use of the legal loopholes of WTO law. In practice, as WTO remedies are not retroactive and there is a time lag between a violation and the time when a decision of noncompliance is rendered and the implementation of countermeasures is authorized, an infringing member may conveniently or opportunistically reap the benefits of noncompliance for years without facing any trade consequences. This remedy gap gives respondents little reason to settle before the end of the adjudication process and may lead frustrated complaining states to subvert the DSU regime by acting outside the legal framework. However, the institutional origins of the free pass in WTO remedies lie in the fact that a member can ‘escape’ WTO discipline if it is willing to pay the “price” in terms of possible retaliation. Thus, weak remedies help to facilitate an efficient breach that reflects the overall effectiveness of the WTO and provides crucial space for political input and a further opportunity for the exercise of state sovereignty. In conclusion, while being criticized for tactics such as the free pass or paper compliance, China is following the same tactics that Western members have practiced for years rather than trying to circumvent the system. Additionally, the PRC’s compliance record with WTO DSB rulings against it is far better than that of the EU and U.S. Currently, China shares the wider view that the WTO is facing an “existential crisis” and continues to play Y. Han (B) East China University of Political Science and Law, Shanghai, China e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Zhang and X. Tan (eds.), A Chinese Perspective on WTO Reform, https://doi.org/10.1007/978-981-19-8230-9_5

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a constructive role in taking advantage of the window of opportunity to rebuild the WTO’s authority in the global trade system. Keywords Free pass · Adverse WTO rulings · Compliance record · Western practices

1 Introduction The year 2022 marks the 21st anniversary of China’s accession to the World Trade Organization (WTO). It is a significant milestone for the Chinese economy as the nation continues to promote high-level opening up and is taking the lead in upholding and helping build multilateral economic and trade rules. Over the 21 years since its accession to the WTO, China has actively participated in WTO dispute settlement practices and made outstanding achievements in compliance with adverse rulings and enforcement. China has a far better compliance record with the DSB rulings against it than any other major trading power, including the United States, the European Union, Canada, Japan and Australia. The extent to which WTO obligations constrain China’s state behavior, however, is contested in the Western literature, especially in U.S. political circles, academia and industry, which often question China’s ability and willingness to implement the WTO treaty. On March 16, 2017, a U.S. public policy think tank, the Information Technology and Innovation Foundation (ITIF), pointed out in a report that China’s systematic mercantilism is a threat to the U.S. economy and the very soul of the global trading system. The report concluded that the United States cannot respond with either appeasement or economic nationalism but rather must assemble an international coalition to pressure China to stop rigging markets and start competing on fair terms.1 On March 6, 2020, the USTR released its 18th report on China’s WTO compliance. In the report, the U.S. administration viewed China as having a poor record of compliance with many aspects of its WTO obligations. China has continued to embrace a state-led, mercantilist approach to the economy and trade, despite WTO members’ expectations and China’s own representations that it would transform its economy and pursue the open, market-oriented policies endorsed by the WTO. At the same time, China’s nonmarket approach has imposed, and continues to impose, substantial costs on WTO members.2 While China’s remarkably good compliance record is widely acknowledged, European critics have pointed to the increased application of “dirty tactics”, arguing that China aims to delay the implementation of DSB rulings wherever possible. To do so, China has avoided openly violating WTO law but has

1

Robert D. Atkinson, Nigel Cory, Stephen Ezell, Stopping China’s Mercantilism: A Doctrine of Constructive, Alliance-Backed Confrontation, March 16, 2017. 2 United States Trade Representative, 2019 Report to Congress on China’s WTO Compliance, March 2020.

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carefully studied its legal obligations to identify loopholes.3 Some Western scholars believe that China lacks the ability and willingness to comply with international trade law. In particular, building on the influential “China Inc.” article by Harvard law professor Mark Wu,4 the U.S.-led coalition has argued that the existing WTO rules are insufficient to deal with the problems created by China’s state capitalism. While the scholarly literature mostly sees China as a pragmatic rule follower, whose interest in an open multilateral trading system makes it less inclined to challenge the WTO, some commentators in the West have been concerned that China’s ‘unfair’ trade practices risk undermining the liberal order. They have claimed that China’s state-led economy puts foreign competitors at a disadvantage through, for instance, forced technology transfer or a comprehensive system of state subsidies for national firms. The U.S., in particular, has long accused China of using state-owned enterprises to ‘subsidize and distort its economy’. Time and again, China’s compliance with international law has been a contentious issue between it and Western countries. Is it true that China will continue to be guided primarily by its narrowly defined national interest rather than strictly adhering to the well-established WTO rules? This chapter holds that, contrary to the widespread belief in the West, China does not treat law as unimportant but is placing increasing emphasis on it. The rule of law plays a crucial role in Chinese Communist Party (CCP) rhetoric,5 and the commitments and concessions made by China have been deeper than those made by almost any other WTO member. Countries that joined the WTO after 1995, including China, acceded through the process outlined in article XII of the Marrakesh Agreement. These “article XII members” have typically been required to make more extensive commitments than the original members that joined through the GATT.6 Nonetheless, China has not only made extensive commitments to implement domestic reforms and reduce trade barriers, including lowering tariffs on goods, opening trade in services, allowing markets to set prices, removing export subsidies and taxes, and ending state influence over the commercial operations of state-owned enterprises, but also shown a good record of complying with adverse WTO rulings. Answering the question of whether China has performed perfectly in compliance with the WTO is difficult. In recent years, China has been accused of violating

3

See Tim Rühlig, “How China Approaches International Law: Implications for Europe”, EU-Asia at a Glance, May 2018, p. 8. 4 Mark Wu, “The ‘China, Inc.’ Challenge to Global Trade Governance”, 57 Harv. Int’l L.J. 261 (2016). 5 One example is Chinese Prime Minister Li Keqiang’s 2017 report on the work of government delivered to the Chinese National People’s Congress. In this speech, Li referred to the phrases “in accordance with the law” or “law-based” for a wide range of issues, including environmental protection, economics and finance, the fight against crime and corruption, charity/social organizations, cybergovernance, religious affairs, military and legal reforms, Hong Kong/Macao affairs and accessibility of the government. 6 https://chinapower.csis.org/china-world-trade-organization-wto/

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the letter and spirit of WTO rules with its unique economic model.7 This chapter aims to answer one question: Has the PRC committed unchecked behavior violated the spirit of international law, such as the free pass,8 paper compliance9 or false promises?10 To be specific, is China following the same tactic of making use of the remedy gap in the WTO system to delay the implementation of DSB rulings employed by the EU and the U.S.? This chapter first analyzes the negative effects of the free pass and then discusses the design of the system to provide enlightenment and a theoretical reference for WTO members to make rational use of and actively participate in multilateral trade rules. Finally, it concludes that although China may not intentionally exploit the legal vagueness and loopholes that create a free pass in the WTO dispute settlement process, as a dominant power in the multilateral trading system, it needs to further strengthen the rules-based trading order and promote institutional innovation and creative reforms of global trade rules. It is generally believed that the WTO system of “prospective” or “forwardlooking” remedies often contrasts negatively with the “retrospective” remedy of reparation traditionally granted by international courts.11 Some have pointed out that it is precisely because WTO remedies were “prospective” that China was immune to sanctions for its strategic embargo of rare earth mineral exports, which lasted nearly two and a half years. This loophole in the implementation of international obligations weakens the effectiveness of the obligations themselves.12 Specifically, the WTO emphasizes that members should abide by the law after the ruling, and it will show its “teeth” (sanctions) to members who continue to fail to comply with DSB rulings and violate the rules after a “reasonable period of time”. However, it will 7

See Henry Gao, “WTO Reform and China: Defining or Defiling the Multilateral Trading System”, Harvard International Law Journal, Volume 62, Special Issue, 2021. 8 China’s strategic embargo of rare earth minerals exports in 2010 was immune from international sanctions owing to the lag. However, the embargo put the serious implications of the free pass on full display. See Note: “(In) Efficient Breach of International Trade Law: The State of the ‘Free Pass’ After China’s Rare Earths Export Embargo”, 125 Harvard Law Review 602–625 (2011). 9 See Timothy Webster, Paper Compliance: How China Implements WTO Decisions, Michigan Journal of International Law, Volume 35, Issue 3, 2014, pp. 525–578. 10 See Stephen Ezell, False Promises II: The Continuing Gap Between China’s WTO Commitments and Its Practices, July 26, 2021. Available at: https://itif.org/publications/2021/07/26/false-pro mises-ii-continuing-gap-between-chinas-WTO-commitments-and-its (Last visited on 2021-09-10). 11 SeE Geraldo Vidigal, “Re-Assessing WTO Remedies: The Prospective and the Retrospective”, 16 Journal of International Economic Law 505-534 (2013). In GATT’s past practice, no retrospective remedies have been provided. WTO law does not prohibit the application of retrospective remedies, but WTO members and academia generally believe that remedies do not have retrospective effects. In the United States-Uruguay Agreement Act, section 129 (c)(1), the parties to the dispute, the United States and Canada, agreed to implement the Dispute Settlement Body’s decision on the “principle of prospective” basis. United States—section 129 (c) (1) of the Uruguay Round Agreements Act, Report of the Panel, WT /DS221/R, 15 July 2002, para. 3. 41. Perhaps inspired by the GATT and WTO, some highly legalized regional trade agreements, such as the North American Free Trade Agreement (NAFTA) and the South American Common Market (MERCOSUR), do not contain a clause regarding state liability for past losses. 12 Note: “(In) Efficient Breach of International Trade Law: The State of the ‘Free Pass’ After China’s Rare Earths Export Embargo”, 125 Harvard Law Review 602–625 (2011).

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not require the breaching party to provide any compensation for the breach before the ruling, which means that the remedy system may cause a member to violate its obligations in a short period of time without fear of any sanction. To curb the negative effects of the remedy gap of the WTO and prevent possible abuse of this legal loophole, scholars of international law have put forward a series of reform suggestions. For example, Joost Pauwelyn suggested that members should apply collective trade sanctions agreed upon by the DSB,13 and William J. David stated that the level of retaliation should be increased to encourage prompt compliance.14 Retrospective compensation is the only way to prevent the practice of “hit and run” and deter potential violators.15 WTO members can solve this problem by renegotiating their obligations16 or establishing a procedure that issues preliminary injunctions through a WTO panel.17 The existing WTO mechanism can also be used to improve the efficiency of the compensation mechanism instead of awaiting the successful conclusion of the Doha Round Negotiations, for example, to decide the compensation level by arbitration under article 25 or to introduce monetary compensation into the WTO system.18 Some scholars have even suggested that the state should reserve the right of “illegal retaliation”. Even without the authorization of the DSB, the state can follow a tit-for-tat strategy to exercise the malicious violation of the free pass.19 In recent years, the discussion of relief issues has undoubtedly prospered, which has been of great value for the development of the WTO and even the theory of international law.

13

See Joost Pauwelyn, “Enforcement and Countermeasures in the WTO: Rules Are Rules—Toward a More Collective Approach”, 94 American Journal of International Law 335, 342–345 (2000). 14 See William J. Davey, “Sanctions in the WTO: Problems and Solutions”, in Chad P. Bown, Joost Pauwelyn (eds.), The Law, Economics and Politics of Retaliation in WTO Dispute Settlement, Cambridge University Press, 2010, p. 365. 15 See Jacques H. J. Bourgeois, “Sanctions and Countermeasures: Do the Remedies Make Sense?”, in Dencho Georgiev, Kim vander Borght (eds.), Reform and Development of the WTO Dispute Settlement System, Cameron May, 2006, p. 42. 16 See W. Schwartz and A. Sykes, “The Economic Structure of Renegotiation and Dispute Resolution in the World Trade Organization”, 31 The Journal of Legal Studies 179, 192 (2002). 17 See Rachel Brewster, “The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 (2011). 18 See Xiaoling Li, Yusong Chen, “Constraints of the WTO Compensation Mechanism and Implications from Recent Practice”, 49 Journal of World Trade 643–663 (2015). Marco Bronckers & Naboth van den Broek, “Financial Compensation in the WTO Improving the Remedies of WTO Dispute Settlement”, 8 Journal of International Economic Law 109–110 (2005). Bernard O’ Connor & Margareta Djordjevic, “Practical Aspects of Monetary Compensation”, 8 Journal of International Economic Law 127–142 (2005). Marco Bronckers & Freya Baetens, “Reconsidering Financial Remedies in WTO Dispute Settlement”, 16 Journal of International Economic Law 281–311(2013). For monetary compensation, the WTO has no clear provisions. The US—section 110 (5) Copyright Act case was the first case of monetary compensation. The United States—section 110 (5) of the U. S. Copyright Act, WT /DS160/ARB25/1, 9 November 2001. 19 See Rachel Brewster, “Shadow Unilateralism: Enforcing International Trade Law at the WTO”, 30 University of Pennsylvania Journal of International Economic Law 1144 - 1146 (2009).

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Every proposal has related problems and disputes,20 which shows the complexity and research value of this problem. For example, punitive compensation will touch the sensitive nerves of a sovereign state. In the case of monetary compensation, the arbitrator’s ability to accurately calculate the impairment or loss of the complainant’s interests may be compromised because the data provided by the parties are incomplete and contain many estimates and assumptions. Allowing retaliation outside the system would be contrary to the purpose of the WTO and undermine its authority. Temporary injunctions may undermine the procedural value of encouraging prelitigation dispute resolution. The best hope for resolving these deficiencies lies in recognizing the reality of the free pass. That is, is it a rational institutional design by WTO members or a legal loophole, and if one member makes use of the remedy gap, will it violate WTO law? Theoretically, to maintain the compulsory power, legitimacy and efficacy of the WTO, compliance assessment should not deviate from the WTO legal framework. Empirically, China has a relatively good, if not perfect, record of compliance with WTO decisions on the whole.21 It can be tempting to conclude that China is a much “fairer player” than other members, even though it has made use of the remedy gap in the institutional design of the WTO in a few cases, because delaying the implementation of DSB rulings to achieve a free pass is the same tactic used for years by the U.S. and EU. Additionally, China has rarely been detected indulging in overtly aggressive tactics, in contrast to the U.S.,22 which has increasingly turned away from trade multilateralism and toward aggressive unilateralism and the raw use of coercive power in its dealings with other states.23 China also has a far better compliance record with adverse WTO rulings against it than any other major trading power.24

20

For example, retrospective compensation cannot eliminate the remedy gap. See Rachel Brewster, “The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 (2011), pp. 148–150. 21 Guang Ma, & Jiang Li, A Legalization Theory Based Response to Timothy Webster’s “Paper Compliance” of China in WTO Dispute Settlement, Asian Journal of WTO & International Health Law and Policy, Vol. 10, No. 2, pp. 541–590. 22 The United States has not only abandoned its traditional leadership role in the multilateral trading system but, beginning under former President Trump, has launched an unprecedented assault on the very system it had once created and led. Discarding any commitment to multilateral cooperation or respect for the rule of law, the United States has openly embraced the raw use of coercive power in trade. This includes launching a trade war with China and going far beyond U.S.–China trade relations. See Kristen Hopewell, Beyond U.S.-China Rivalry: Rule Breaking, Economic Coercion, and the Weaponization of Trade, AJIL Unbound, Volume 116, 2022, p. 59. 23 See Kristen Hopewell, Beyond U.S.-China Rivalry: Rule Breaking, Economic Coercion, and the Weaponization of Trade, AJIL Unbound, Volume 116, 2022, p. 58. 24 Historically, developed countries, consisting of the United States, the European Union, Canada, Japan and Australia, have a compliance rate of only 50%. Developing countries score considerably better, with a compliance rate of 80%. Out of the 33 concluded cases, the PRC has a compliance record of 85.7% of all completed original cases. See Tim Rühlig, “How China Approaches International Law: Implications for Europe”, EU-Asia at a Glance, May 2018, pp. 7–8.

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2 The Phenomenon of the Free Pass in the WTO and Its Negative Effects A. The achievements and shortcomings of WTO remedies According to the DSU, there are three remedy methods available. The most important is usually to secure the withdrawal of the measures concerned if they are found to be inconsistent with the provisions of any covered agreements. The provision of compensation should be resorted to only if the immediate withdrawal of the measure is impracticable and as a temporary measure pending the withdrawal of the measure, which is inconsistent with a covered agreement. The last resort that this understanding provides to the member invoking the dispute settlement procedures is the possibility of suspending the application of concessions or other obligations under the covered agreements on a discriminatory basis to the other member, subject to authorization by the DSB. That is, compliance with WTO law and removal of WTO-inconsistent trade measures are the preferred options, and compensation and retaliation are the second-best options, which reflects the reality that the WTO admits that it cannot force members to perform compulsorily. These “alternate” options are intended to encourage compliance, prevent “free riders”, restore the overall balance of rights and obligations in the case of noncompliance, and play an incentive and reward role to support the persistence of the WTO.25 Compared with traditional international law, the WTO not only sets clear obligations for its members but also establishes legal consequences for those who violate the rules, thus forming a legal system that combines primary rules with secondary rules, which greatly enhances the enforcement of WTO law. This strong enforceability poses a challenge to the general view that international law has always been “soft” and called for voluntary compliance.26 Although the WTO tries to create efficient legal remedies, there are still inefficiencies in its dispute settlement framework that have not been fully explored. For example, as long as a lawsuit continues, the respondent has the right to choose to violate the trade rules, and the complainant cannot be compensated for the losses suffered before the ultimate award. The remedy gap caused by this time lag may lead to violations that cannot be prevented, thus weakening the effectiveness of WTO obligations.27 For example, Antigua initiated a dispute settlement procedure against the United States for violating the service trade agreement in March 2003 and was not authorized to retaliate until August 2005. Therefore, although the theoretical shortest litigation time is 18 months, many cases will take longer in practice. Liability is the core of international law and the reason for the existence and effectiveness of legal rules. If a deviation from these rules cannot result in predictable consequences and 25

See Judith H. Bello, “Review: The Jurisprudence of the GATT and the WTO: Insights on Treaty and Economic Relations by John. Jackson”, 95 American Journal of International Law 987 (2001). 26 See Joost Pauwelyn, “The Transformation of World Trade”, 104 Michigan Law Review 25 (2005). 27 See Rachel Brewster, “The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 (2011), pp. 102–158; Note: “(In) Efficient Breach of International Trade Law: The State of the ‘Free Pass’ After China’s Rare Earths Export Embargo”, 125 Harvard Law Review 602–625 (2011).

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the nonbreaching party cannot obtain a prompt and adequate remedy, the authority and effectiveness of the dispute settlement mechanism will be greatly reduced. B. Origins of the WTO remedy gap The remedies available to a common law court for the violation of property rights are either legal or equitable. WTO legal remedies are “backward-looking” in the sense that they compensate a plaintiff for harm already suffered, whereas equitable relief is “forward-looking” in the sense that it prevents a defendant from inflicting harm on the plaintiff in the future. A court may combine the two forms of relief, awarding money damages for past harms and enjoining acts that could cause future harm.28 However, WTO remedies are nonretroactive, nonpunitive and time-limited; that is, they provide only compensation that is close to the actual damage rather than equivalent to the damage.29 Since the inception of the WTO, scholars have noted the strong possibility that it will undercompensate a complainant for a breach of agreement. At the inception of the WTO, Professor Petros C. Mavroidis deduced that the newly designed DSU theoretically allowed a “hit and run” type of breach of agreement,30 which Professor Rachel Brewster called “stall-and-withdraw”.31 Countries may take advantage of this loophole and continue to violate trade rules for several years without any trade retaliation, which motivates the respondent to lag the settlement of a dispute as much as possible and has counterproductive effects on settlement negotiations.32 Joel P. Trachtman commented that diplomats and other practitioners seem to think of WTO remedies as intended to implement “rebalancing”; however, a rebalancing that was solely prospective would be a strange one. If this were the only consideration, such a remedy would clearly be insufficient to provide an incentive to comply.33 Rachel Brewster summarized these issues as a “remedy gap”.34 Professor John H. Jackson first used the term “free pass” to describe this gap, seeing it as a sign of leaving the

28

See Robert Cooter & Thomas Ulen, Law and Economics, 3rd ed., Addison Wesley Longman, 2000, p. 98. 29 Article 31.1 of Draft Articles on Responsibility of States for Internationally Wrongful Acts. In this sense, WTO remedies are no longer bound by general international law on state responsibility. See R.Rajesh Babu, Remedies Under the WTO Legal System, Martinus Nijhoff Publishers, 2012, p. 102. 30 See Petros C. Mavroidis, “Remedies in the WTO Legal System: Between a Rock and a Hard Place”, 11 European Journal of International Law 783 (2000). 31 See Rachel Brewster, “Shadow Unilateralism: Enforcing International Trade Law at the WTO”, 30 University of Pennsylvania Journal of International Economic Law, pp. 1143–1145. 32 See Rachel Brewster, “The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 ( 2011), p. 158. 33 See Joel P. Trachtman, “Building the WTO Cathedral”, 43 Stanford Journal of International Law 140–141 (2007). 34 See Rachel Brewster, “The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 (2011), pp. 102–158.

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solution for another day.35 This chapter summarizes the phenomena of the remedy gap and free pass as characteristics of the WTO’s “weak remedies”. The arbitration process of the DSU takes too long and lacks the ability to impose retrospective compensation for losses. These two factors will lead to the phenomenon of the free pass, which will make the nonbreaching party unable to obtain sufficient compensation and eventually lead to the low efficiency of the DSU. These lags have undermined the WTO’s usefulness as a way to resolve trade disputes. Today, given the slowness of the process, governments can have a three-year or longer free pass to implement illegal protectionist measures while litigation drags on. Even the most obvious violation of the rules can take a long time to adjudicate.36 On the one hand, a long time must pass before the complainant can take countermeasures against the breaching party; that is, only when the respondent’s measures are judged to be inconsistent with the WTO agreement can the complainant be authorized to retaliate. On the other hand, the DSU does not provide any retrospective compensation for losses. The basic remedies provided by WTO law include measures to stop violating the agreement, compensation agreed upon by both parties,37 and nonconsensual suspension of concessions or other obligations. The WTO agreement stipulates two kinds of remedies: compensation and retaliation. On the surface, the aggrieved party is granted the opportunity to choose, but in fact, the option is granted to the injuring party; that is, the potential breaching party can choose to provide the prescribed compensation or wait for the authorized retaliation. At present, the remedy of retaliation judgment is intended to compensate for the direct loss of the complainant. This is only the damage caused by restricting market access due to tariff barriers, quantitative restrictions and cumbersome measures in related industries. However, the WTO contains many other rights beyond reciprocal market access, and violation of these other rights will cause different economic damages to the complainant. As long as the DSB arbitrators solve the infringement related to market access in a dispute confined to only one department, the possibility that arbitrators will turn a blind eye to tariffs is highly problematic.38 Many critics believe that the “equivalence standard” in WTO arbitration under article 22.4 and the authorized retaliation award ignore the rebalancing of reciprocal market access.39 WTO arbitrators’ estimates of 35

See John H. Jackson, “The Case of the World Trade Organization”, 84 International Affairs 452 (2008). 36 See James Bacchus and Simon Lester, “Trade Justice delayed Is Trade Justice Denied: How to Make WTO Dispute Settlement Faster and More Effective”, Free Trade Bulletin, November 20, 2019, Number 75, p. 1. 37 Article 22.4 of DSU. 38 See Simon A. B. Schropp, “The Equivalence Standard under Article 22. 4 of the DSU: A ‘Tariffic’ Misunderstanding?”, in Chad Brown & Joost Pauwelyn (eds.), in The Law, Economics and Politics of Retaliation in WTO Dispute Settlement, Chad Brown & Joost Pauwelyn (eds.), Cambridge University Press, 2010, p. 448. 39 See Petros C. Mavroidis, “Remedies in the WTO Legal System: Between a Rock and a Hard Place”, 11 European Journal of International Law 783 (2000), pp. 763–813; Alexander Keck, “WTO Dispute Settlement: What Role for Economic Analysis? A Commentary on Fritz Breuss”, 4 Journal of Industry, Competition and Trade 365–371 (2004).

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trade loss in the case of noncompliance never translate into damage equivalent to economic welfare. WTO rulings have been unsuccessful even in their limited goal of providing retaliation that affects trade. For example, a detailed legal and economic analysis of all relevant arbitration awards shows that the impact on trade of breaches of agreement has been significantly miscalculated, and countermeasure rulings on bans on export subsidies have had no effect in terms of rebalancing.40 C. Negative effects caused by the WTO remedy gap International law is not known for being quick or effective. Cases can drag on for years, have limited legal force, and are infamous for noncompliance. Cases take much longer to complete today than they did at the inception of the WTO in 1995. There are a number of possible explanations for this change: parties may now be making a greater number of claims; the wide-ranging jurisprudence that has developed over the years may make litigating and judging more complex; and the WTO litigation culture may have become more legalistic as the role of private lawyers has expanded.41 Another reason that should not be neglected is the institutional design of the WTO remedy system. The establishment of the DSU is the result of compromise among the interests of various countries. At that time, countries headed by the United States wanted a formal system that allowed trade sanctions, but members of the European Community and Japan were interested in limiting the use of unilateral sanctions by the United States. The compromise of different interests resulted in the current WTO remedy system, which makes it easier to authorize the use of trade sanctions, but only after the conclusion of the multilateral judicial process. When the judicial process takes a short time, the remedy gap will be small. However, when the dispute settlement time lags for a long period, the free pass phenomenon caused by the remedy gap becomes prominent.42 Because of the remedy gap, WTO members have no incentive to stop or correct illegal measures as soon as possible, which also provides a good opportunity for opportunistic noncompliance.43 First, during the proceeding, before being declared illegal, a violation of the WTO agreement can be exempted by law, in which case other members are not legally allowed to take retaliatory measures. The system design may have the following consequences: the respondent may provide more documents to the panel and increase the complexity of the case to extend the time of the adjudication stage (the first stage of dispute settlement). The respondent can increase the time of the compliance stage 40

See Fritz Breuss, “WTO Dispute Settlement: An Economic Analysis of Four EU -US Mine Trade Wars”, 4 Journal of Industry, Competition and Trade 275–315 (2004). 41 See James Bacchus and Simon Lester, “Trade Justice delayed Is Trade Justice Denied: How to Make WTO Dispute Settlement Faster and More Effective”, Free Trade Bulletin, November 20, 2019, Number 75, pp. 1–2. 42 See Rachel Brewster,“The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 (2011), p. 106. 43 See David J. Townsend and Steve Charnovitz, “Preventing Opportunistic Uncompliance by WTO Members”, 14 Journal of International Economic Law 465 (2011).

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(the second stage of dispute settlement) by frequently using article 22.5 of the DSU.44 As remedy is limited to anticipated loss or impairment of benefits, losses prior to the breach cannot be compensated (the third stage of dispute settlement). Due to the lack of retrospective compensation for losses, members affected by breach of contract cannot obtain full compensation for all their losses, according to the DSU. The time requirement for an appeal may further increase the losses of negatively affected members. According to public choice theory, the result is that WTO members can maintain a protectionist measure in many cases and receive political gains for many years without compensating other members for their losses. In this context, without considering other important factors, such as potentially reducing the reputational cost of violating WTO rules, remedies for some WTO violations are likely to be inefficient.45 According to article 22.1 of the DSU, if the respondent stops the illegal measures within a reasonable period of time, as stipulated in article 21.3 of the DSU, the complainant cannot take formal sanctions against it. As a result, even if the nonbreaching party takes countermeasures or the respondent is willing to give the complainant the prescribed compensation, the breaching party has already benefited from the short-term breach of agreement before it was found to be illegal, and its reputation loss from the free pass due to the abuse of the remedy gap may be reduced or even offset by its provision of compensation. In other words, countries that make use of the remedy gap to obtain a free pass will usually be regarded as trustworthy trading partners as long as they comply with the ruling after the dispute settlement procedure and will not suffer much loss of state reputation. The EC banana dispute is an example of members using a “reasonable period of time” as a way to avoid their WTO obligations.46 Hypothetically, most members want to settle disputes as soon as possible and fulfill their international obligations in good faith. However, when faced with domestic political needs, the possibility of WTO members’ speculative abuse of the remedy gap cannot be ruled out. This will set a bad precedent for other members. Second, since the actions of other countries can continue until they are found to be in violation of the WTO agreement, the injured party actually has a choice of taking retaliatory measures. The WTO agreement does not allow retaliation against other members before the end of the DSU procedure, but the members affected by a breach of agreement may still take retaliatory measures while proceeding. The reason is that as the time required to complete the dispute settlement procedure increases,47 44

See Rachel Brewster, “The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 (2011), pp. 121–122. 45 See Claus D. Zimmermann, “Toleration of Temporary Non-Compliance: The Systemic Safety Valve of WTO Dispute Settlement Revisited”, 3 Trade, Law and Development 398 (2011). 46 See Erin N. Palmer, “The WTO Slips Up: A Critique of the World Trade Organization’s Dispute Settlement Understanding Through the European Union Banana Dispute”, 69 Tennessee Law Review 473–474 (2002). 47 In the US-Upland Cotton case, the litigation took six and a half years from the formation of the original panel on May 19, 2003, to the DSB’s authorization of trade sanctions on November 19, 2009. DS291, 292, and 293 involved GMO labeling issues and took even longer. For example, the Upland cotton panel worked for 13 months, and the GMO panel worked for 26 months.

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this kind of de facto exception is sometimes more effective than the legal exception clause. Specifically, the respondent government is motivated to maintain a violation for as long as possible and delay the litigation. Because the term of each government is short, they tend to provide greater protection for key sectors such as steel and agriculture to gain support from domestic voters while leaving the cost of violating trade rules to the next administration. The complainant then seems to have no choice but to take timely and effective retaliatory measures to force the respondent to stop its noncompliant measures. That is, the complainant cannot tolerate nonperformance during the dispute settlement process and must unilaterally solve the trade violation problem when there is no better choice. Of course, whether such retaliation is illegal also needs to be determined by WTO judicial bodies. The DSU claims that unilateral retaliation is legally not allowed, but WTO members have more choice in fact. Thus, instead of providing remedies during litigation, the current institutional design has incentivized governments to seek “vigilante justice” and even use enforcement strategies that are formally prohibited by the WTO framework. Since the outbreak of the Ukrainian crisis, Western powers have imposed several rounds of sanctions on Russia.48 Russian President Vladimir Putin’s presidential decree (Decree No. 560 of August 6, 2014) is generally regarded as Russia’s inappropriate response to Western sanctions and probably constitutes unilateral retaliation, which is not allowed by article 23 under the DSU. In theory, even if the Western sanctions violate WTO law, to achieve its foreign policy goals, Russia should seek remedies through the WTO instead of directly imposing countermeasures against the sanctioning countries. However, since the legal remedies provided by the DSU are nonretrospective, that is, the two remedies of compensation or countermeasures lack retrospective and punitive effects, the party affected by the breach has no time to wait for DSB authorization to effectively prevent the other party’s violations. This situation will eventually lead to spiraling escalation and mutual sanctions and retaliation. In summary, due to the long time taken for WTO dispute settlement, the remedy system contains a large gap in that the remedy is conditional and nonretrospective and begins only when specific measures are found to have been violated. The remedy gap provides another explanation for the disproportionate success rate of complainants: by prolonging the dispute settlement process, the respondent may face lower overall sanctions, and there is no reason for the respondent to settle the dispute early, while the complainant has no right to rebalance the trade concession for the damage caused by the previous breach of agreement. The fact that complaining parties have a win rate of more than 90% shows that in many cases where the legal issues are relatively clear, the respondent will take advantage of the remedy gap as long as there is a possibility of extending the dispute settlement procedure.49 For example, even though the WTO Appellate Body repeatedly determined that the zeroing method violated trade rules, 48

The case numbers related to the EU-Russia tariff dispute are DS485, DS462, and DS476, which shows the deteriorating trend of economic and trade relations between Europe and Russia. 49 As of September 29, 2015, only 14 complainants had lost all cases that had entered the panel process. The win rate in 157 reports is 91.9%, which shows that due to the remedy gap in the WTO,

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the United States continued to argue for the legality of this practice in antidumping cases.50 The possible political and economic power gaps between parties to these disputes make it even more difficult for the injured party to truly take advantage of DSU-authorized means of retaliation.

3 The Free Pass in the WTO and Its Institutional Origins As mentioned above, scholars have extensively studied the WTO remedy problem and put forward a large number of reform proposals; why have they not been adopted? If the WTO remedy gap is an obvious legal loophole, why has it not been used by countries to serve their own interests, resulting in large-scale free passes (short-term violations) within the WTO system? What are the institutional origins of the free pass phenomenon? Is it justified in any way? (A) Strengthening cooperation to act as a “safety valve” for the WTO system Essentially, WTO agreements are incomplete contracts with built-in flexibility that allow governments to renegotiate the original agreement during the period of validity, and incomplete contracts correspond to incomplete remedies. At the objective level, when negotiating rules, parties to a trade agreement cannot fully and precisely anticipate the possible effects of those rules in the future. The reason is that humans have only incomplete information about future events, and legislators wish to draft laws in all-encompassing language. At the subjective level, negotiators sometimes must intentionally craft ambiguous rules to allow parties to agree on them as quickly as possible. As a result, even if national interests are not considered, the inherent ambiguity of language can cause WTO members to disagree in their understanding and application of the law, ultimately leading to trade disputes. Many disputes arise from deviations in the parties’ understanding of treaty language, and such cases are not settled until the treaty is interpreted and clarified by the panel or the appellate body.51 In the history of the WTO, only in a few cases have the parties reached a compromise at the

the party that is the subject of complaint has no incentive to resolve the dispute before the conclusion of the proceedings. 50 United States—Continued Existence and Application of Zeroing Methodology, Report of the Panel, WT/DS350/R, 1 October 2008; United States—Measures Relating to Zeroing and Sunset Reviews, Report of the Panel, WT /DS322 /R, 30 September 2006; United States—Laws, Regulations and Methodology for Calculating Dumping Margins (“Zeroing”), Report of the Panel, WT /DS294 /R, 31 October2005. See Dukgeun Ahn and Patrick Messerlin, “United States—AntiDumping Measures on Certain Shrimp and Diamond Sawblades from China: Never Ending Zeroing in the WTO?”, 13 World Trade Review 267–279 (2014). 51 Appellate Body Report, China- Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/ AB/ R, adopted 21 December 2009.

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beginning of the panel’s work.52 It is not realistic to force members to comply with their obligations immediately and completely if their failure to comply with WTO rules (in the short term) is not deliberate, to serve their own interests, but rather is due to vague rules or inability to perform objectively. While compliance is the “primary goal” in the WTO system, compensation and retaliation, as interim measures, provide a flexible solution to disputes in which the respondent suspends compliance with the award, at least to avoid retaliation between disputing parties in cases where immediate enforcement is difficult in complex situations. In other words, since the impact of WTO rules on economic development, noneconomic values, and economic equality is difficult to assess accurately in advance, governments need exit options that temporarily sidestep the pressure of full compliance in order to gain “breathing space” to improve the intractable situation. In contrast to a government’s failure to comply with agreements for objective reasons, which undermines the authority of the WTO system, the existing remedy system, which does not require punitive compensation for violating members but provides appropriate remedies for nonviolating parties, provides a necessary “safety valve” for the multilateral trading system. (B) Respecting sovereignty and tolerating temporary noncompliance From a realistic international political perspective, sovereign states cannot be compelled to act in a particular way as long as extreme measures (such as bans or restrictions on trade or military intervention) are excluded. In other words, international law has its limits. In fact, there are only two effective punitive strategies. One is to deny the interests of a country’s future cooperation through termination. Under such circumstances, states are effectively induced to comply with an agreement even if the short-term interests of a breach outweigh the lost interests of future cooperation. The second is to create a system in which a sovereign state’s reputation is negatively affected when it ignores its initial concessions. It is difficult to find a precise interconnection between international law and state reputation, but such an interconnection does exist. Hudec noted: True, like the Pope, international law has no army. But the Pope still makes a pretty good living without one. And so does international legal obligation. Governments do respond, not invariably but more than just occasionally. The greater a government’s own reliance on the system of international rules in question, the more influence such obligations will have over its conduct.53 The Lotus principle suggests that sovereign states may act in any way they wish so long as they do not contravene an explicit prohibition. In other words, the restrictions or limitations that a state is subject to while taking action are derived mainly from the rules it has agreed upon with other states. All rules, including WTO remedies, are a reflection of the common will of members. They are willing to abide by the 52

For example, EC—Measures Affecting Butter Products, WT/DS72, or EC—Trade Description of Scallops, WT/DS12 and 14. 53 See Alexander Roitinger, The Institutional Design of Trade Policy Flexibility in the World Trading Order: Analysis and New Direction for Reform, Ph.D. thesis, University of St. Gallen, 2004, p.83.

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rules primarily because of the interests that are supported by doing so. However, it is difficult to imagine trade rules that are comprehensive enough to cover all issues and all possible situations. Therefore, it is not feasible to require all members to fully and immediately abide by WTO rules if external shocks or unexpected domestic political and economic turbulence. Developing countries, in particular, had to accept “package commitments” when they joined the WTO to avoid being excluded from the multilateral trading system. They are prone to violating the rules due to capacity issues, and there is no point in penalizing them. The remedy gap is tantamount to providing flexibility for members to “escape” multilateral disciplines as long as they are willing to pay a certain price under the corresponding provisions. In other words, since the WTO, like its predecessor, the GATT, is essentially an opportunity for members to access each other’s markets, there is no need to require absolute compliance with the standards of public international law, such as human rights law. As long as the WTO remains essentially an international organization, it should take into account and adapt to the realities of international politics. The rationale for the design and use of the WTO remedy system is also supported by contractual economic theory. The concept of “effective breach” or “rebalancing” refers to the permissible situation in which the breaching party chooses to pay compensation for losses in stead of performance of contract. After disputes occur, such renegotiation of compensation can play a positive and affirmative role in the requirements and effectiveness of the WTO system. Retaliation becomes a government’s way of maintaining its interests in the event that another government infringes or withdraws a concession. Sometimes infringement may not be opportunistic; members are simply adapting to changing political and economic conditions. For example, as a legal exemption clause, safeguard measures allow members to unilaterally raise trade barriers when conditions are met, for as much as four years, without compensating other members. Similarly, members’ use of the WTO remedy gap as a de facto exemption clause in the event of unforeseen circumstances can also be an adaptation to political realities. Members are simply adapting to constantly changing political and economic circumstances.54 Trade agreements are negotiated with the parties without precise knowledge of the actual future impact of these negotiated provisions, as there are too many changing political and economic variables. Therefore, WTO agreements are essentially incomplete contracts with built-in flexibility allowing governments to renegotiate the original agreements over their lifetime.55 Even though the WTO dispute settlement system is not designed to encourage “effective breach”, in the banana dispute, for example, as long as the respondent is willing to accept the cost of noncompliance, the existing design of the DSU at least de facto tolerates it. Since the WTO system allows for interim noncompliance in certain circumstances, the member in default is not obliged to establish compliance before the end of the “reasonable period” 54

See Rachel Brewster, “The Remedy Gap: Institutional Design, Retaliation, and Trade Law Enforcement”, 80 The George Washington Law Review 102–158 (2011), p. 127. 55 See Claudia D. Feldkamp, Between Politics and Law: Rethinking the Basis of Legal Obligation in the World Trade Regime, Doctoral Dissertation at Columbia University, 2010, pp. 11–12.

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under article 21.3 of the DSU but can choose to “buy” additional time in exceptional circumstances, which constitutes not a weakness but rather a strength of the WTO legal framework. Not every member can comply with WTO rules in a timely manner because of either lack of capacity or strong domestic opposition. Since the free pass is usually a country’s response to short-term changes in its trading environment, such interim noncompliance does not significantly harm the multilateral trading system. However, a prolonged period of noncompliance would undoubtedly cause heavy damage to the system in general, eroding the credibility of WTO law and the important welfare-generating mechanism for progressive trade liberalization. Intra- and extracontractual flexibility is essential for sovereign states to continue to comply with restrictive and complex legal frameworks such as WTO agreements.56 Basically, the “time lag” in the WTO judicial procedure may indeed lead to the aggravation of the free pass phenomenon. In theory, shortening the time between breach and remedy, as an alternative to retroactive compensation, would at least reduce the inefficiency caused by the free pass. However, the lag serves an important purpose, enabling WTO members to address a range of challenges. For example, the lag during the consultation phase prior to litigation provides a usually successful means for states to reach mutually satisfactory solutions without the cost of litigation.57 By providing WTO members with the opportunity to bring their policies into line with their trade obligations, the time lag also provides protection against unintentional defaults, and such an efficient system should not be prevented. Furthermore, even if the respondent knows that no matter how long the proceedings are delayed, an adverse ruling will not make it liable for its own actions until the end of the dispute settlement process, it must take into account the considerable attorney fees incurred in the meantime. In other words, although the respondent does not have to compensate the complainant during the proceedings, it can’t delay indefinitely on the grounds of economic efficiency.58 Moreover, if a controversial trade measure is not dealt with as soon as possible, it will affect the normal cooperative relations between trading partners. (C) Weak remedies as a tool of institutional balance The law is meant to be an apolitical, fair and neutral concept, but it is itself a product of politics, embodying the interests and will of states at the time the rules were established. The interaction between law and politics, discipline and participation, appeal and withdrawal, political commitment and political dialog will not affect the long-term authority and legitimacy of the WTO but will help it operate more stably 56

See Claus D. Zimmermann, “Toleration of Temporary Non-Compliance: The Systemic Safety Valve of WTO Dispute Settlement Revisited”, 3 Trade, Law and Development 398 (2011), pp. 402– 404. 57 Note: “(In) Efficient Breach of International Trade Law: The State of the ‘Free Pass’ After China’s Rare Earths Export Embargo”, 125 Harvard Law Review 602–625 (2011), p. 620. 58 See Bruce Wilson, “The WTO Dispute Settlement System and Its Operation: A Brief Overview of the First Ten Years”, in Rufus Yerxa, Bruce Wilson (eds.), Key Issues in WTO Dispute Settlement: The First Ten Years, Cambridge University Press, 2005, p. 23.

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and sustainably. In this process, weak remedies play the role of a “safety valve” to balance the system. First, the contrast between the WTO’s highly developed judiciary and its weak legislative capacity constitutes an institutional imbalance. The dispute settlement mechanism is designed to move beyond “jungle politics” and provide stability and certainty in international trade relations; however, when and under what circumstances sovereign states will choose to disobey trade rules based on their individual concerns is difficult to predict. The ultimate source of WTO authority traces back to domestic political processes, and no country will ever comply with the rules voluntarily and unconditionally; members will always have to consider what is in their own best interest. In other words, if the law is too strong, it will inevitably restrict political interaction and thus fail to take into full account the special needs of different member states, such as domestic politics and the economy. In this regard, modifying the rules through follow-up negotiations or emphasizing judicial activism has proven to be an impractical solution. In this sense, weak remedies, such as the exception clause, can have a balancing effect by ensuring that each member has the autonomy to formulate trade policy within a certain range without worrying about being punished for it. In contrast to the legalization account, which finds the inherent unpredictability of weak remedies unacceptable and counter to the spirit of a rulebased regime, the political counter narrative characterizes weak remedies as a crucial injection of politics. First, weak remedies help take pressure off a highly legalized system with weak legislative capacity, and second, the possibility of “escape” from WTO obligations encourages members to accept new rules when the full impact cannot be fully calculated and appreciated at the time the rules are made.59 In other words, weak remedies can help alleviate the pressure of a highly legalized WTO system with weak legislative capacity and allow members to “escape” their WTO obligations, which could encourage them to accept new trade rules. Thus, the relief gap acts as a buffer between the rigidity of legal rules and the uncertainty of political reality. Second, weak remedies give WTO members who do not have the opportunity to fully express their interest demand at the stage of negotiating rules or who have limited ability to actually comply an opportunity to exercise sovereignty, which is conducive to alleviating the “import legitimacy” crisis of the WTO. No country can predict what circumstances at what time will weaken their willingness to comply or even make them choose not to comply, but this reaction to the rules is undoubtedly a way to exercise their sovereignty and express their political will. It is also a second opportunity for the respondent to express its political attitude and will outside the rules negotiations. In the authorized retaliation phase, the complainant can obtain legal remedies by means of “suspension of concessions or suspension of other obligations”, which is tantamount to an opportunity to take protective measures against foreign competition in the domestic market. This shows that both complainants and respondents have a “voice” in the judicial process. More importantly, the United 59

See Claudia D. Feldkamp, Between Politics and Law: Rethinking the Basis of Legal Obligation in the World Trade Regime, Doctoral Dissertation at Columbia University, 2010, p. 116.

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States, the European Union and other major trading countries have more influence than other members in the rule-making and judicial stages. This real inequality aggravates the “input legitimacy” crisis of the WTO. The WTO remedy system suggests that members can choose not to comply with trade rules but at the cost of compensating the complainant or accepting retaliation. When strict application of the rules would lead to unjust outcomes or when compliance is not economically or politically feasible, noncompliance can be a way to “voice” questions and grievances about the system. Thus, weak remedies can lower the threshold of “input legitimacy”. Last, the characteristics of the WTO’s weak remedies are consistent with members’ psychological expectations; that is, they want to have the possibility of being exempted from liability in the worst scenario they face. Since the WTO requires all obligations to be accepted in a “package”, not every member has the opportunity to fully articulate its claims in relation to sensitive and critical issues at the time of accession. In the face of an ever-changing trading environment, weak remedies allow members to temporarily “escape” situations that were not adequately anticipated in order to avoid strict compliance that would cause them to incur overly costly obligations. The legitimacy of WTO rules depends critically on the sense of participation of all members in the process of jointly making and applying legally binding rules. Weak remedies are conducive to improving their enthusiasm for participating in and continuing to support the WTO. Thus, weak remedies not only improve the overall efficiency of the WTO system but also meet the psychological expectations of its members, both of which are important components of the organization’s “output legitimacy”.

4 The Bridge Side of the Free Pass in the WTO (A) The free pass is the rational design of the system The dispute settlement mechanism combines political, diplomatic and judicial methods, making it an important institutional guarantee for members to fulfill their obligations. However, if the WTO places too much emphasis on legalization, it will lead to a significant increase in domestic political pressure for protection. The features of the WTO’s weak remedies help to increase the flexibility of the system, which, while weakening the effectiveness of interstate cooperation, also reduces the likelihood of its collapse. The WTO system formally requires strict compliance but in fact is designed not to facilitate compliance with WTO rules but rather to limit the costs of noncompliance and allow members to lag compliance by providing compensation or suffering countermeasures. In other words, the stability of the cooperative mechanism is enhanced not by making WTO rules stricter but by making them more flexible. From the idealistic legalist point of view, the WTO remedy rules are indeed insufficient to promote compliance. However, given of the uncertainty of the international

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trade environment and the need for sovereign countries to avoid risks, the institutional design of weak WTO remedies has a reasonable and realistic side. Due to the large number of members involved, the complexity of the issues and the “package” commitment, WTO agreements may contain provisions that some members are not willing to accept. In some cases, the costs of full and real-time compliance may exceed their expected benefits. Before engaging in costly renegotiation to modify these rules, members should be allowed the flexibility to comply as needed in their own circumstances. For example, when domestic laws that are inconsistent with WTO agreements require lengthy procedures to be amended, certain important and sensitive domestic industries require a period of time to be adjusted or protected, and external shocks (such as international financial crises) or domestic political and economic problems lead to a lack of capacity to fulfill its own obligations, a respondent may use the remedy gap to gain the necessary “breathing space” to solve its own problems and concerns. WTO members are also reluctant to compensate for the damage caused by violating WTO agreements because of a misunderstanding of the nature or scope of their obligations. If this is indeed a “flaw” or “loophole”, why did the Uruguay Round negotiations preserve it? Most likely, it was a realistic institutional design to ensure ratification of the package of treaty agreements. This design also helps maintain long-term domestic support for the new legal regime, as countries require a period to adjust to a newly reformed system before they are willing to make further changes. Negotiators may have decided to leave the question of expanding available remedies for a future negotiating round, and the outcome may also be a reflection of power politics.60 In the long run, the institutional design of weak remedies may not be a defect of the dispute settlement mechanism but a rational choice to encourage members to participate more actively in the WTO system and ultimately improve global welfare. (B) The free pass can act as a “safety valve” The WTO remedy gap represents a weak remedy that can be opportunistically abused by a member. At the same time, it provides useful space for members to solve disputes amicably. In some circumstances, compared with compliance with all corrective economic policies, the peaceful settlement of international disputes is even more important.61 To some extent, the remedy gap can be described as a double-edged sword. It is important to note that there are reasons for the institutional design of the WTO relief gap. The remedy’s weak character helps to provide the necessary legal flexibility for members to pursue and implement their national priorities and ameliorates the issue of legitimacy by increasing members’ political participation. Any reform of WTO remedies must balance the pros and cons to ensure that the system is balanced in a dynamic legal and political process. This allows members the opportunity to take certain measures for a specific period without worrying about 60

See Mark Wu, “Rethinking the Temporary Breach Puzzle: A Window on the Future of International Trade Conflicts”, 40 Yale Journal of International Law 105–106 (2005). 61 See John Howard Jackson, The World Trading System: Law and Policy of International Economic Relations, MIT Press, 1997, p. 340.

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paying too much. Thus, each member has the ability to retain the necessary space for autonomous foreign trade policy and the flexibility to choose how to comply. In practice, as long as members face temporary domestic political or economic difficulties in implementing trade rules or DSB recommendations or awards, they will not be completely excluded from the WTO for noncompliance or compliance with awards. The “reasonable period of time” according to article 21 of the DSU plays a crucial role as a systemic safety valve. Otherwise, the international community could face a less open global trading system.62 (C) The free pass does not necessarily result in noncompliance The WTO legal system is similar to a huge machine in operation, and the remedy rules are just one of the parts. It is unreasonable to require the remedy system to play a role in completely preventing violations. In practice, the WTO remedy gap or the resulting free pass phenomenon has not had a significant negative impact on the normal functioning of the system. To date, the enforcement rate of WTO cases is 93%. It is clear that remedy is not the only or decisive factor in inducing members to comply with WTO agreements or to implement the panel or appellate body reports. In fact, the seemingly weak enforcement of DSU rules has been enhanced by informal sanctions (cooling diplomatic relations, reducing levels of foreign aid, or refusing to share security information).63 Moreover, the reputation of a country that keeps its commitments also serves as an appropriate balance and effective incentive for WTO members to comply. Breaching parties are not penalized by transferring money or other property to the injured party, but that does not mean they are not penalized at all. If international law is important, it is because there is some form of sanction for infringement, mainly direct sanctions and reputation sanctions. However, most agreements do not provide specific direct sanctions, and reputation sanctions are an important element of state compliance with international law. A state that violates an international commitment signals to other states that it does not take its international promises seriously and disregards its obligations, and when the state tries to enter into future agreements, its potential partners may take into account the risk that the agreement will be violated and will be more reluctant to offer concessions of their own in exchange for the state’s promises. If there is enough doubt, potential partners may refuse to cooperate with the country.64 A good international reputation helps a country easily join international organizations and benefit from international cooperation. In contrast, a country with a poor reputation may lose many opportunities to cooperate in international relations.65 62

See Claus D. Zimmermann, “Toleration of Temporary Non-Compliance: The Systemic Safety Valve of WTO Dispute Settlement Revisited”, 3 Trade, Law and Development 398 (2011), pp. 404– 405. 63 See Claus D. Zimmermann, “Strengthening the WTO by Replacing Trade Retaliation with Stronger Informal Remedies?”, 11 Journal of International Trade Law and Policy 82–102 (2012). 64 See Andrew T. Guzman, “The Design of International Agreements”, 16 European Journal of International Law 596 (2005). 65 See Andrew T. Guzman, “The Cost of Credibility: Explaining Resistance to Interstate Dispute Resolution Mechanisms”, 16 Journal of Legal Studies 311 (2002).

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By issuing a report, the panel or appellate body could make it clear that the respondent has violated WTO rules, which would damage the reputation of the respondent. For some members, WTO agreements are consistent with their notions of justice, and they will abide by them in any case.66 In view of the uncertainty of the international trade environment and the need for sovereign countries to avoid risks, the institutional design of WTO weak remedies has a reasonable and realistic side. Due to the large number of members involved, the complexity of the issues and the “package commitment”, WTO agreements may contain provisions that some members are not willing to accept. In some cases, the costs of full and real-time compliance may exceed their expected benefits. Before engaging in costly renegotiation to modify these rules, members should be allowed the flexibility to comply as needed in their own circumstances. For example, when domestic laws that are inconsistent with WTO agreements require lengthy procedures to be amended, certain important and sensitive domestic industries require a period of time to be adjusted or protected, and external shocks (such as international financial crises) or domestic political and economic problems lead to a lack of capacity to fulfill their own obligations, the respondent may use the remedy gap to gain the necessary “breathing space” to solve its own problems and concerns. WTO members are also reluctant to compensate for the damage caused by violating WTO agreements out of a misunderstanding of the nature or scope of their obligations.

5 Conclusions Over the 21 years since its accession to the WTO, China has actively participated in the practice of WTO dispute settlement and made outstanding achievements in compliance with adverse rulings and enforcement. China has a far better compliance record with the DSB rulings against it than any other major trading power, including the United States, the EU, Canada, Japan and Australia. However, the Chinese domestic rule of law and the country’s compliance record with international law remain subjects of contentious discussion. China’s active participation in WTO dispute resolution and good performance in adverse ruling compliance have not resulted in improvements in China’s reputation, especially in U.S. political, academic and industrial circles, which often question China’s ability and willingness to abide by the WTO treaty. As a rising power, China is motivated to establish a good state reputation. Moreover, as China has become deeply integrated into the global economy, it is more likely to comply without delay when targeted measures involve firms that are integrated into regional and global value chains.67 However, the current national image 66

See Petros C. Mavroidis, “Remedies in the WTO Legal System: Between a Rock and a Hard Place”, 11 European Journal of International Law 783 (2000), p. 810. 67 See Aydin Baris Yildirim, “Firms’ Integration into Value Chains and Compliance with Adverse WTO Panel Rulings”, 17 World Trade Rev. 1, 2018, pp. 1–31.

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of China in the international community is closely related to the history of its encounters with the Western world in modern times and the history of its participation in the practice of international law., China’s performance in abiding by international law as a newcomer to the modern international law system has not been positively and objectively evaluated by the international community. This analysis reveals that China is deeply concerned with its international image and reputation; it wants to avoid being clearly named a violator of well-established WTO rules and adverse rulings in order to portray itself as complying with international law and as a reliable partner in international affairs. That is part of the reason that China has a far better compliance record with DSB rulings against it than any other major trading power. While it is often accused of flouting the rules, China does a reasonably good job of complying with the rulings of WTO complaints brought against it. The so-called remedy gap or free pass, whether from the history of the design of the remedy system or from the practice of WTO members, is the result of the coordination of interests and political interaction among members. In terms of immediate, full compliance and full compensation, the remedy gap does have a series of negative effects. On the one hand, since WTO remedies are conditional and nonretrospective, the complainant is not compensated for damages suffered before the end of the dispute settlement process. Moreover, the complainant is unable to make any changes to the structure of this remedy system. Since nonretroactive compensation is not sufficient to accurately reflect the true damages, when the complainant has no other legitimate means to stop the violation in the course of the proceedings, it may choose to take trade retaliation measures outside the WTO framework to force the respondent to change. On the other hand, WTO remedies are not punitive in nature and do not have a deterrent effect on the breaching party. Even when the legal issues are relatively clear and the outcome of dispute settlement is relatively certain, the respondent tends to decide whether to extend the duration of dispute settlement procedures according to its own needs. Thus, there is a risk that a member may benefit from maintaining a protectionist measure for a long period of time without having to compensate the affected party for its losses. Considering that the WTO is a contemporary multilateral organization, its rules and procedures are notoriously antiquated. WTO rules—at least as currently constituted—have proven incapable of satisfactorily adjudicating systemic frictions and incompatibilities, and the free pass is an example. The WTO remedy gap is the compromise of power politics and may lead to a free pass in the dispute settlement process. This may become a major institutional design flaw if a powerful and willing country exploits it.68 Over the years, scholars have put forward various reform proposals to stop the practice of the free pass that would undermine the rulesbased global trading system. However, there are reasons for the design of the WTO’s weak remedies system, that is, to meet real political needs and achieve a balanced system and to promote trade and political dialog on trade-related issues. At present, negotiations on the multilateral trading regime are progressing slowly, and how and 68

See Timothy Webster, “Paper Compliance: How China Implements WTO Decisions”, Michigan Journal of International Law, Volume 35, Issue 3, 2014, p. 607.

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when the WTO remedy system will be reformed in the future are still unknown. To better protect its interests, China should gain more litigation experience in simplifying procedures and shortening the free pass time for its trading partners. Only by becoming the most experienced litigator can China become the greatest beneficiary of the remedy gap and the least likely victim of the free pass. Furthermore, to avoid being criticized as complying with the letter but violating the spirit of the WTO agreement, or paper compliance, China should refrain from conveniently or opportunistically abusing the institutional design flaw in the WTO or testing global trade rules and norms by engaging in practices that are inconsistent with its treaty commitments. This chapter focuses on the behavioral effects and institutional design of the free pass in the WTO system and discusses whether China has tacitly made use of it or constructively responded with it. Since China entered into the WTO in 2001, Western countries, led by the United States, have continually doubted its willingness and ability to comply with WTO trade rules and have repeatedly accused it of violating these rules on various occasions and even filed lawsuits. For example, some critics have put forward the theory of paper compliance, arguing that China often reports to the DSB that it has “fully complied” with its international obligations, but the facts are not always simple. Despite a good implementation record, China still promulgates policies that clearly violate basic WTO tenets.69 This chapter holds that the idea that China abuses the remedy gap in the WTO and takes advantage of the free pass is not convincing because compliance with a WTO dispute ruling becomes meaningful only when a panel or appellate body report stating that the defendant country has indeed violated WTO law has been adopted. China is a newcomer to the modern international law system, and its compliance with international law has not been positively and objectively evaluated by the international community. Compared with the United States, which holds a leading position in the international trading system and legal culture, and other countries, China neither exerts its influence nor shows a willingness to take advantage of the free pass. Rather, China is keeping a close eye on the evolving trends at the WTO and playing a constructive role in driving useful WTO reforms. Since it entered into the WTO, China has made great contributions to the development of the world economic and multilateral trade system. Western powers, however, view China’s rapid development with suspicion, as they attribute its success mostly to its state-led development model, with state-owned enterprises, massive subsidies, and heavy government intervention playing major roles.70 As a rising power, China has every reason to be properly responsive to skeptics and to portray itself as complying with international law and being a reliable partner in international affairs. Currently, there are many disagreements among WTO members over how to address underlying problems within the organization. These divisions offer China a good 69

See Timothy Webster, “Paper Compliance: How China Implements WTO Decisions”, 35 Michigan Journal of International Law 525–578 (2014). 70 See Henry Gao, WTO Reform: A China Round?, Proceedings of the ASIL Annual Meeting, Volume 114, 2020, p. 23.

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opportunity to cast itself as a defender of global trade and elevate its role within the WTO. Given China’s growing global role and the impact of international law, its role in addressing issues such as the free pass or improving service commitments and domestic policies will significantly shape the organization and the world’s future. As China’s economy continues to grow, the incompatibilities between its national policy and the multilateral trade system have caused tensions in international relations. China must make necessary concessions in some areas, such as the governance and operation of state-owned enterprises and industrial subsidies. To ensure China’s participation in the global economy and provide a rare opportunity for it to have a say in the development of next-generation global trade rules, thereby helping to create an external environment conducive to its rise, China should constructively seek ways to make dispute settlement with its trade partners faster and more effective. Today, China has pledged to be a responsible power in international society, and it can be expected to strive to portray its trade policies as motivated by the pursuit of global poverty alleviation and sustainable development. China, the United States, and Europe are poised to play leading roles in the reform process and therefore should seek common ground with each other.

Empirical Evolution of the WTO Security Exceptions Clause and China’s Discourse Yong Liang and Zhijie Peng

Abstract Influenced in recent years by multiple factors in recent years, such as antiglobalization, the return of the state and the major public health crisis caused by the COVID-19 pandemic, the international community has entered a nontraditional security era. In the name of protecting nontraditional security, many countries have actively and frequently adopted abnormal regulatory measures and have attempted to seek exemptions from obligations through article XXI of the GATT or article 73 of the TRIPS (Security Exceptions). A series of economic and trade mega-agreements, such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the U.S.-Mexico-Canada Agreement, the EU-Japan Economic Partnership Agreement (USMCA), the Investment Cooperation and Facilitation Treaty between the Federative Republic of Brazil and the Republic of India (Brazil-India BIT ), and the Regional Comprehensive Economic Partnership (RCEP), that have been concluded since 2018 cover more nontraditional security in their security exceptions clauses or essential security interests clauses, possibly leading to more countries expanding the interpretation and application of the security exceptions clause in future practice. The circular promotion of the security exceptions clause in its evolution and textual development may break the overall balance of existing WTO rules and exacerbate further imbalances. This chapter specifically studies the interpretation and logical evolution of security exceptions clauses in the DS512 and DS567, providing an empirical basis for the justification of disputed measures through the invocation of article XXI of the GATT. It is recommended that under the guidance of an overall national security concept, China should consider its national conditions, taking both its present and its long-term interests into account. Regarding China’s security laws, This chapter is sponsored by the Research Project of 2020 National Social Science Fund of China, entitled Information Security Guarantee Mechanism in the Era of Big Data (20FEXB069), and Research Project of 2020 Shanghai Philosophy and Social Science Foundation, entitled Research on the Chinese Innovation on International Investment Dispute Mediation Mechanism in the Post COVID-19 Pandemic (2020BFX020). This chapter is also sponsored by the Core Research Project of 2021 National Social Science Fund of China, abridged entitled Research on Theories and Practice of International Law (21VMG027). Y. Liang (B) · Z. Peng Fudan University School of Law, Shanghai, China e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Zhang and X. Tan (eds.), A Chinese Perspective on WTO Reform, https://doi.org/10.1007/978-981-19-8230-9_6

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policies and practices, it is recommended that the double-edged sword function of the security exceptions clause should be focused on foreign contrasts. That is, the security exceptions clause should be regarded as a defensive clause in terms of its position and content design and should be invoked under a high level of self-restraint in dispute settlement to avoid excessive strengthening or even alienation of national security during execution and to provide institutional support for a more balanced Chinese discourse in the establishment of a new generation of international economic rules. Keywords WTO security exceptions · National security · Article XXI · China’s discourse

1 Introduction Influenced by the return of the state,1 the wave of populism and the rise of economic unilateralism, since the Russia Transit Case (DS512)2 in 2016, disputes involving article XXI of the General Agreement on Tariffs and Trade (GATT)3 have been frequently submitted to the WTO dispute settlement mechanism (DSM),4 which has recently shown an unprecedented trend of “wells” in number or density. The growing 1

See José E. Alvarez, The Return of the State, Minnesota Journal of International Law, Vol. 20, No. 2, 2011. 2 Russia Transit Case refers to Russia—Measures Concerning Traffic in Transit (DS512). The dispute in the case has its roots in the Crimean crisis of 2014, when several countries, including the United States and Europe, imposed sanctions on Russia after Russia sent troops to Ukraine and subsumed the Crimea region of Ukraine into Russia, and Russia imposed a trade embargo on some countries, including the United States and Europe, in response. Starting in 2015, the EU-Ukraine association agreement (in particular, the EU-Ukraine Free Trade Agreement, which came into force on 1 January 2016) has made it impossible for Ukraine to transit goods destined for Kazakhstan through the Russian-Ukrainian border on Russian territory since 1 January 2016 on the grounds of national security, and Ukraine can transit goods only through the BelarusianRussian border, with special identification and registration at special control points. The same restrictions apply to the movement of goods from Ukraine in Kyrgyzstan since 1 July 2016; see WT/DS512/R, para.7.1(a). In addition, transit through Russia is prohibited for certain specific goods; see WT/DS512/R, para.7.1(b). In fact, merchandise transiting from Ukraine to Mongolia, Tajikistan, Turkmenistan and Uzbekistan is also subject to such transitional rules. 3 Article XXI of the GATT states, “Nothing in this Agreement shall be construed: (a) to require a Member to furnish any information the disclosure of which it considers contrary to its essential security interests; or (b) to prevent a Member from taking any action which it considers necessary for the protection of its essential security interests; (i) relating to fissionable materials or the materials from which they are derived; (ii) relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment; (iii) taken in time of war or other emergency in international relations; or (c) to prevent a Member from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.”. 4 In addition to in the Russia Transit Case (DS512), cases related to the security exceptions clause include “United Arab Emirates—Measures Relating to Trade in Goods and Services, and TradeRelated Aspects of Intellectual Property Rights” (DS526), “United States—Certain Measures on

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number of cases mentioned above seems to indicate that some countries tend to link economic or trade issues with national security and seek to utilize the ambiguity of concepts and regulations to obtain immunity for breaches of their WTO obligations. The fundamental reason for this problem is that there are differences in the understanding of the connotations and extent of the security exceptions clause. Especially when the centripetal force of countries is declining, based on the consideration of sovereign interests, governments tend to claim greater discretion for their actions, arguing that imposing undue hurdles on them would curtail their ability to effectively protect national security, thus putting their countries in peril.5 As part of the dispute settlement process, the panel is reluctant to apply and interpret related terms for fear of “eroding” a country’s national security authority. In addition, even if the panel renders a final decision, it will inevitably result in dissatisfaction for some countries. In this context, this chapter studies the panel report of DS512 distributed on 5 April 2019 focusing on the application and interpretation of article XXI of the GATT and the panel report of DS567 distributed on 16 June 2020 focusing on the application and interpretation of article 73 of Trade-Related Aspects of Intellectual Property Rights (TRIPS),6 which have become the pilot interpretations of these articles and are the only two panel reports related to the security exceptions clause distributed by the WTO Dispute Settlement Body (DSB) to date. In view of the involvement of the multilateral trading system led by the WTO in a serious crisis, how do the two panel reports apply and interpret the security exceptions clause? What kind of effects will the pending cases mentioned above or potential disputes that may be submitted to the DSM have on the DSM? How can the intent and purpose of security exceptions and the internal mechanism of equilibrium for the contracting parties be properly understood? What are the consequences for Chinese legislation and discourse in the future? First, this chapter will conduct a legal analysis of DS512 and DS567 and attempt to examine and analyze the latest developments of the security exceptions clause in the DSM. Second, this chapter will trace the draft history of the security exceptions clause and find the historical reasons for its textual structure and the implicit internal balance behind the clause. Third, against the background of the WTO crisis, this chapter will propose three possible approaches to the improvement and optimization of the security exceptions clause from three different perspectives: procedural preconditions, substantive requirements, and domestic mechanisms. Last but not least, at Steel and Aluminium Products” (DS544, 547, 548, 550, 551, 552, 554, 556, 564), “Saudi Arabia— Measures Concerning the Protection of Intellectual Property Rights” (DS567), “Qatar—Certain Measures Concerning Goods from the United Arab Emirates” (DS576) and “Japan—Measures Related to the Exportation of Products and Technology to Korea” (DS590). Among them, the “United States—Certain Measures on Steel and Aluminium Products” triggered nine trade disputes, involved many major economies and attracted widespread attention. 5 See Congyan Cai, Enforcing a New National Security? China’s National Security Law and International Law, Journal of East Asia and International Law, 2017, 10 (1), p. 66. 6 Both article XXI of the GATT and article 73 of the TRIPS Agreement are related to security exceptions. For convenience in expression, the security exceptions shall be referred to as collective expressions unless otherwise specified.

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the domestic legislative level, this chapter will illustrate China’s domestic security legislation system and clarify China’s understanding of and position on national security. At the international legislative level, it will summarize the characteristics of the legislative techniques applied in the security exceptions clauses of China’s international treaties; at the level of international dispute settlement, it will provide China with trade policy suggestions from the perspectives of both the claimant and the defendant.

2 Application and Interpretation of the Security Exceptions Clause in WTO Dispute Settlement Practice The security exceptions clause in the WTO legal framework has several sources.7 Although DS567 refers to paragraph (b)(iii) of article 73 of the TRIPS, considering its high coincidence with the text of article XXI of the GATT and the consistency of “judicial practice” of the panel in the specific trial process,8 this chapter will categorize both sources as a security exception issue for academic research. A. The Reading of the Security Exceptions Clause in the Russia Transit Case The Russia Transit Case9 was launched by Ukraine on 14 September 2016. Ukraine claimed that transit regulatory measures taken by Russia did not meet the requirements of the free transshipment rules of article V of the GATT and the Protocol of the Accession of the Russian Federation (Russia’s Protocol) and that Russia had not complied with the transparency rules of article X of the GATT to issue and manage corresponding regulations.10 Russia did not specifically state factual evidence or legal grounds for its defense but directly invoked article XXI(b)(iii) of the GATT to 7

The security exception clauses in the WTO multilateral agreement exist in article XXI of the GATT, article 14 of the General Agreement on Trade in Services (GATS), article 73 of TRIPS, article 3 of the Agreement on Trade-Related Investment Measures (TRIMS) and article 2 of the Agreement on Technical Barriers to Trade (TBT). In the plurilateral agreement, the clause is in article 3.1 of the Government Procurement Agreement (GPA). 8 WT/DS567/R, para.7.231, para.7.241. 9 RUssia Transit Case (DS512). The dispute in the case has its roots in the Crimean crisis of 2014, when several countries, including the United States and Europe, imposed sanctions on Russia after Russia sent troops to Ukraine and subsumed the Crimea region of Ukraine into Russia, and Russia imposed a trade embargo on some countries, including the United States and Europe, in response. Starting in 2015, the EU-Ukraine association agreement (in particular, the EU-Ukraine Free Trade Agreement, which came into force on 1 January 2016) has made it impossible for Ukraine to transit goods destined for Kazakhstan through the Russian-Ukrainian border on Russian territory since 1 January 2016 on the grounds of national security, and Ukraine can transit goods only through the Belarusian-Russian border, with special identification and registration at special control points. The same restrictions apply to the movement of goods from Ukraine in Kyrgyzstan since 1 July 2016; see WT/DS512/R, para. 7.1(a). In addition, transit through Russia is prohibited for certain specific goods; see WT/DS512/R, para.7.1(b). In fact, merchandise transiting from Ukraine to Mongolia, Tajikistan, Turkmenistan and Uzbekistan is also subject to such transitional rules. 10 See WT/DS512/R, para.7.2.

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allege that the panel had no jurisdiction over the case and no authority to interpret the relevant provisions.11 The panel in this case primarily considered the following four aspects of the invocation of article XXI(b)(iii) of the GATT. First, the panel pointed out that the three subprovisions in article XXI(b) of the GATT constitute “alternative” rather than “cumulative” requirements, and a disputed measure that meets the requirement of any subprovision shall be deemed justifiable.12 Through the study of the text of article XXI and the analysis of the negotiating and drafting history, the panel determined that the wording “it considers” in the preamble of article XXI means that the self-judging power granted to the member cannot be extended to determine the various situations in the subprovisions,13 thus affirming its jurisdiction over the case. Second, the panel recognized that from March 2014 to the end of 2016, relations between Russia and Ukraine had deteriorated considerably. At the end of 2016, the United Nations General Assembly declared that there was an armed conflict between Russia and Ukraine,14 which constituted an “emergency in international relations”.15 In general, the panel accepted relatively flexible requirements for the judgment of the claimant regarding the situation. It affirmed that members have the right to decide which interests to protect based on the specific circumstances of external and internal threats, and members are allowed to adjust their judgments as the situation changes.16 Third, the panel noted that members can meet the requirements for invoking the security exceptions clause only if they prove that the disputed measures are “necessary” to protect their “essential security interests” (ESI).17 While the panel recognized that members do have the power to consider their own ESI, they must provide explanations in good faith.18 The rapid deterioration of Russia-Ukraine relations after the signing of an association agreement between Ukraine and the European Union in March 2014 and after some member states of the European Union imposed sanctions on Russia led to an emergency in international relations. As a result, the panel concluded that Russia had respected the provisions of the preamble to article XXI(b) of the GATT.19

11

See WT/DS512/R, para.7.3–7.4. See WT/DS512/R, para.7.68. 13 See WT/DS512/R, para.7.101. 14 See UN General Assembly Resolution No. 71/205, December 19, 2016 (Exhibit UKR-91). 15 See WT/DS512/R, paras.7.122–7.126. 16 See WT/DS512/R, para.7.131. 17 See WT/DS512/R, para.7.127. 18 See WT/DS512/R, paras.7.131–7.133. 19 See WT/DS512/R, paras.7.142, 7.148. 12

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Fourth, the panel believed that the WTO Appellate Body’s legal reasoning in the China—Rare Earths Case20 was also applicable to determine the provisional relationship between Russia’s Protocol and article XXI of the GATT.21 The panel believed that these documents jointly constituted and represented Russia’s “single package” obligations under the WTO. Through a comprehensive analysis of paragraph 1161 of the Report of the Working Party on the Accession of the Russian Federation (Russian Report), the panel decided that this paragraph required Russia to comply with “the other provisions of the WTO Agreement” when it took relevant measures, which provided the legal basis for Russia’s invocation of article XXI of the GATT. B. The Reading of the Security Exceptions Clause in the Saudi IPR Case The Saudi IPR Case22 was launched by Qatar on 9 November 2018. Qatar claimed that Saudi Arabia’s measures to restrict the rights and interests of Qatari entities23 and to condone infringements24 violated the TRIPS measures for applying criminal investigation and procedures to intellectual property infringements and granting corresponding relief.25 Saudi Arabia invoked article 73 of the TRIPS, arguing that the 2014–2017 series of events constituted “an emergency in international relations” that

20 China—Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, DS431/432/433, panel reports were circulated on 26 March 2014, and the Appellate Body reports were circulated on 7 August 2014. 21 See WT/DS512/R, para.7.232. 22 As the panel was first to note regarding the factual aspects, the issues that arose in this case must be understood “in the context of the serious deterioration of relations between Saudi Arabia, Qatar and certain other countries from the MENA region”. [See WT/DS567/R, para. 2.16.] The Saudis argued that Qatar had repeatedly violated the relevant provisions of the Riyadh Agreement and continued to renege on its commitments between November 2014 and June 2017 by failing to comply with its member obligations under the GCC (the Gulf Cooperation Council, a regional security organization that includes the UAE, Bahrain, Qatar, Kuwait, Oman and other countries, was originally established at the initiative of Saudi Arabia in light of the volatile situation in the Middle East and North Africa), supporting and harboring extremist individuals and allowing them to use Qatari media platforms to disseminate information that endangered Saudi national security. 23 Saudi Arabia—Measures Concerning the Protection of Intellectual Property Rights (DS567, Saudi IPR Case). This case concerned the beIN Media Group LLC and affiliates, an international sports and entertainment company whose business in Saudi Arabia is focused on providing exclusive broadcasting services for sports events such as the NBA, the FIFA World Cup, and European Football League events. Its commercial revenue streams are mainly from television subscriptions, audio and video recordings of events, and licensing fees for broadcasting. 24 Saudi Arabia cut off all diplomatic consular channels and bilateral relations with Qatar on 5 June 2017, closed ports, banned Qatari citizens from entering the country, and expelled all Qatari citizens from Saudi Arabia within 14 days. On19 June 2017, the Ministry of Culture and Information and GCAM issued an announcement that the beIN Media Group LLC and affiliates had not obtained a government license to distribute media content in Saudi Arabia and were not authorized to operate in the country; On 11 July 2017, the Saudi Financial Services Authority issued a decision further prohibiting payment or renewal of subscriptions to beIN’s sports channels and programs through any means or channels of payment, measures that virtually cut off any possibility of beIN continuing to operate in Saudi Arabia. 25 See WT/DS567/R, paras.7.165–7.166.

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threatened its national ESI and objecting to Qatar’s camouflaging a “political, geopolitical and essential security dispute” with a “trade dispute”. Saudi Arabia contended that the panel should decline to provide conclusions or recommendations on this case.26 However, the panel examined the following four aspects of the invocation of article 73 of the TRIPS. First, the panel followed the ideas of the panel report in the Russia Transit Case,27 believing that it must first determine whether the member’s actions were performed under the relevant circumstances, that is, whether there was objectively an “emergency in international relations” within the context of article 73 of the TRIPS. After taking multiple factors into account, the panel found that the event of total severance of diplomatic and consular relations on 5 June 2017 could be regarded as falling within the context of the relevant provisions.28 Second, the panel examined the introductory phrase “taken in time of” in subparagraph (iii) and connected “action” to “emergency in international relations”, arguing that the connection between these two elements constituted a “chronological concurrence that is also an objective fact, amenable to objective determination”,29 which meant relevant measures must be reviewed determine that they were “taken at the time of conflict”. In considering the temporal element, the panel affirmed that a “state of emergency in international relations” had existed since 5 June 2017.30 Third, the panel raised the need to assess whether Saudi Arabia adequately articulated ESI to invoke the security exceptions clause as a way to circumvent its WTO obligations.31 In this case, Saudi Arabia proposed that its ESI was to “protect itself from the dangers of terrorism and extremism”,32 which was affirmed by the panel.33 Although Qatar pointed out that Saudi Arabia’s relevant statements were “vague” and “imprecise”, the panel believed that the text of article 73 of the TRIPS did not provide any basis for requiring Saudi Arabia to provide a more precise statement. According 26

See WT/DS567/R, para.7.8. See WT/DS512/R, paras.7.27–7.149. 28 Based on the analysis of Commentary on the Severance of Diplomatic Relations by International Law Scholars [Commentary on the 1969 Vienna Convention on the Law of Treaties, Article 63: Severance of diplomatic or consular relations, (Brill Nijhoff, 2009), pp. 786–787, paras. 4–5.], the severity of similar measures under article 41 of the Charter of the United Nations [“The Security Council may decide what measures not involving the use of armed force are to be employed to give effect to its decisions, and it may call upon the Members of the United Nations to apply such measures. These may include complete or interruption partial of economic relations and of rail, sea, air, postal, telegraphic, radio, and other means of communication, and the severance of diplomatic relations”], similar severance measures by other MENA countries in the GCC and Saudi Arabia’s strong accusation against Qatar, it is believed that the panel does not need to take a position or make a decision on a specific dispute and can determine that there is indeed an “emergency in international relations” in this case. 29 See WT/DS512/R, paras.7.70, 7.77. See WT/DS567/R, para.7.247. 30 See WT/DS567/R, para.7.269. 31 See WT/DS567/R, para.7.250. 32 See WT/DS567/R, para.7.233, 7.280. Saudi Arabia’s first written submission, paras.1, 6(c) and 14. 33 See WT/DS567/R, para.7.282. 27

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to the “minimally satisfactory” standard especially mentioned in the Russia Transit Case, one member has met the requirement if it can provide a standard for the panel to review the relevant action.34 Finally, the question for the panel was whether the antisympathy measures satisfied “the minimum requirement of plausibility”.35 General antisympathy measures announced by the Saudi media on 6 June 2017, which cut off Qatari nationals from the Saudi judicial system and law firms, were closely linked to the official “Comprehensive Measures” adopted on 5 June 2017.36 It was therefore not unreasonable for Saudi Arabia to take antisympathy measures to protect its ESI.37 However, the panel pointed out that, contrary to the former conclusion, the subsequent inactivity of Saudi Arabia affected not only Qatar and Qatari nationals but also a range of thirdparty IP rights holders.38 Therefore, there was no rational or logical link between the overall measures and the nonapplication of Saudi criminal procedures and penalties to Qatar.39 Thus, the Saudi authorities’ inactivity should not be regarded as related to the protection of Saudi Arabia’s ESI.40 C. Comments on the Security Exceptions Clause Arguments in the Two Cases 1. Similarities There is no doubt that the panels affirmed their jurisdiction in the two cases invoking security exception clauses by treaty interpretation or reference to precedents. In addition, as “a line of equilibrium” established in the invocation of article XX (general exceptions) of the GATT,41 the analysis is performed in the following order. Step 1: (1) Examine whether there are disputed measures and whether these disputed measures are in compliance with the defendant’s obligations in the WTO (including obligations set out in the legal documents of the WTO as well as the WTO-plus obligations in the accession protocols or reports of the working group), and (2) determine whether these disputed measures can be covered by a security exceptions clause.42 If the answer to both questions is yes, the substantive review should be performed. 34

See WT/DS567/R, para.7.281. See WT/DS567/R, para.7.285. 36 See WT/DS567/R, para.7.287. 37 See WT/DS567/R, para.7.288. 38 See WT/DS567/R, para.7.289. 39 See WT/DS567/R, para.7.292. 40 See WT/DS567/R, para.7.293. 41 See Colombia—Measures Relating to the Importation of Textiles, Apparel and Footwear, WT/DS461/R, circulated on 27 November 2015, para.3.16, Source text: …Yet this does not render the panel’s analysis of the obligation and the exception a single and integrated one. On the contrary, an analysis of whether a measure infringes an obligation necessarily precedes, and is distinct from, the “further and separate” assessment of whether such measure is otherwise justified, referring to United States—Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R, circulated on 12 October 1998, para.159. Also see Thailand—Customs and Fiscal Measures on Cigarettes from the Philippines, WT/DS371/AB/R, circulated on 17 June 2011, para.173. 42 See WT/DS567/R, para.7.6. 35

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Step 2: Examine whether the circumstance enumerated in the security exceptions clauses has been satisfied. For example, “other emergency in international relations” mentioned in the Russia Transit Case is “an objective fact”, generally referring to “a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state”.43 However, the sole political or economic conflicts cannot be regarded as meeting the requirement of “other emergency in international relations” unless “they give rise to defense and military interests, or maintenance of law and public order interests”.44 In other words, although the panels did not provide a clear and specific definition of ESI, they attempted to narrow the ESI definition to prevent members from easily invoking ESI to exempt themselves from their commitments in the WTO45 and attempted to maintain the internal balance between the protection of the ESI of a member and the trade liberalization of other members. Only those interests are directed to the basic functioning and interests of a member under ESI.46 Step 3: Even if the intent of the disputed measures is directed to ESI, determine that the disputed measures comply with the requirement of the proportionality. From another point of view, the disputed measures should be qualified with a three-tiered test: (1) Is the security exceptions clause “self-judging”? In legal practice, the panels favor the defendant having the authority to explain and even evaluate its own ESI according to the actual situation.47 (2) Is the invocation of ESI free from the panel’s review? If so, the panel then considers that the defendant must interpret ESI in good faith and that the panel has the right to review the disputed measures. (3) What is the responsibility of the invoking party in terms of the burden of proof? The panel affirmed that in regard to the relationship between the measures and the purpose of protecting ESI, they only required the invoking party to articulate its ESI rather than “minor details” if it met the “minimum plausibility” standard, which can provide a sufficient standard or basis for the panel’s review.48 2. Differences In the Russia Transit Case, the panel basically supported Russia. With respect to the legal basis, the panel was also concerned with the interpretation of Russia’s Protocol. In terms of analysis and reasoning approaches, the panel’s review of article XXI(b)(iii) of the GATT was based mainly on textual interpretation and the interpretation of the object and purpose of the GATT, and it strongly stressed the entire drafting process of the relevant articles. Moreover, as the Russia Transit Case was the first case invoking article XXI after the establishment of the WTO, it aroused great

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See WT/DS567/R, para.7.245. See WT/DS567/R, para.7.245. 45 See WT/DS512/R, para. 7.132. See WT/DS567/R, para.7.250. 46 See WT/DS512/R, para. 7.130. 47 See WT/DS512/R, para. 7.131. 48 See WT/DS567/R, paras. 7.249–7.250. 44

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concern among WTO members. Accordingly, nearly all opinions of third parties were taken into account except the opinions of the US and a few other countries.49 In the Saudi IPR Case, the panel first reviewed the relevant measures taken by the defendant and supported its antisympathy measures but held that Saudi Arabia’s failure to regulate infringement did not meet the applicable requirements of the security exceptions clause. Second, due to the close relationship with intellectual property in the case, the panel also reviewed the domestic intellectual property legislative rules of Saudi Arabia and examined and collected evidence about the accusation of intellectual property infringement. Throughout the proceedings, the panel not only adopted traditional methods of treaty interpretation but also referred extensively to the panel report of the Russia Transit Case, demonstrating the subsequent influence of the practice of the DSB.

3 A Textual Study of the Security Exceptions Clause: Contextual Interpretation and Inherent Balance Security is the most fundamental need for human survival and development, and it is also the eternal theme of human beings.50 National security is directly related to the survival of a country and is a country’s inherent right.51 Consequently, even the countries that are most active in promoting trade liberalization and facilitation leave room for national security in their domestic laws and international treaties.52 When concluding treaties with foreign countries, all countries “coincidentally” evade a clear definition and allow nonexhaustive enumeration to explain this. This may be because national security is a highly abstract but “self-evident” symbol,53 and it also stems from the consideration of a balance between trade liberalization pursued by governments and the ESI that must be defended. Petros C. Mavroidis concluded that article XXI of the GATT was “a question of balance”, which cannot be too light or too broad.54 For example, article XXI of the GATT and article 73 of the TRIPS not only adopt the wording “simple but key words” to express its meaning but also 49

Eighteen WTO members, including major global economies such as the U.S., China, the EU and Japan, participated in the dispute settlement process as third parties. 50 See Xiaofeng Yu, Zhijiang Wei and Danzi Liao (ed.), Non-traditional Security, Third Edition, Volume I, Peking University Press, 2020, p.6. 51 See Yong Liang, On the Rebalancing of Security Exceptions in the International Trade System, Law Science, Vol. 2, 2020. 52 The expression “national security” was first used by President Theodore Roosevelt in a speech to the U.S. Congress in 1904. [See Jaemin Lee: “Commercializing National Security: National Security Exceptions’ Outer Parameter under GATT Article XXI”, Asian Journal of WTO & International Health Law & Policy, Vol. 13, 2018, p. 81.] The National Security Law of 1947 systematically elaborated national security. 53 See A. Wolfers, “National Security as An Ambiguous Symbol”, Political Science Quarterly, 1952, p.67. 54 See Petros C. Mavroidis: The Regulation of International Trade, MIT Press, 2016, pp. 479–480.

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use the quantitative wording “any”. Additionally, the third subparagraph of article XXI adopts the wording “other” to expand members’ actions.55 There are historical reasons for the formation of this particular structure that could explain why security exceptions clauses are the origin of so many current controversies. To some extent, these historical reasons seem to determine that the interpretation and application of the security exceptions clause is bound to ultimately become an ambiguous and inconclusive issue. A. Contextual Interpretation 1. Political Bargain Almost since its inception, article XXI of the GATT has sparked discussions on political matters among the contracting parties.56 In the early stage of the preparation of the International Trade Organization (ITO), the original idea of the contracting parties was to divide the respective functions of the ITO and the United Nations (UN) by establishing “relationship between international organizations” provisions in the ITO agreement, ensuring that the UN has the power to resolve political issues, while the ITO deals only with economic and trade issues. For example, paragraph 3 of article 86 of the Havana Charter once contained provisions that required the ITO not to attempt to act on any political issues that might be involved.57 Although this article was not finally incorporated into the GATT, it was related to the provisions of paragraph 1 of article XXIX of the GATT and its additional notes and connected with subsequent discussions on this issue at the Conference of the Parties,58 which implicitly stated that the principles of the Havana Charter should be the guiding principles for the parties. In other words, in the original provisional arrangement, the contracting parties intended to prevent the GATT from becoming involved in any political matters, The parties even considered the misuse of the security exceptions clause at that time. For example, in the discussions at the Geneva Conference on 24 July 1947, some parties commented that “some latitude must be granted for security rather than commercial purposes”, “the spirit in which Members of the Organization would interpret these provisions was the only guarantee against abuse”,59 and “the provisions of Article XXI are subject to the provisions of the paragraph 2 of Article 55

Paragraph (c) of article XXI, Source text: to prevent a Member from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security. 56 See WTO Analytical Index, Article XII, WTO Publications, pp. 10–12, https://www.wto.org/eng lish/res_e/booksp_e/gatt_ai_e/art21_e.pdf. 57 It states that “3. The Members recognize that the Organization should not attempt to act which would involve passing judgement in any way on essentially political matters. Accordingly, and in order to avoid conflict of responsibility between the United Nations and the Organization with respect to such matters, any measure taken by a Member directly in connection with a political matter brought before the United Nations in accordance with the provisions of Chapters IV or VI of the United Nations Charter shall be deemed to fall within the scope of the United Nations and shall not be subject to the provisions of this Charter.”. 58 GATT/CP.6/SR.12, p. 4. 59 E/P/C/T/A/SR.33, p. 3.

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XXIII”.60 Representatives of contracting members also expressed their opinions of the issues, including the following statement: “the Charter ought to make provision for economic measures which are closely linked with political questions, … In the sense of excluding them because he believed that an economic measure taken for political reasons was not properly speaking an economic measure but a political measure and as such was not within the competence of the Organization”.61 However, there was also a strong opinion that political issues should not be within the jurisdiction of the WTO. Even in the Uruguay Round (1986–1994), contracting members still disagreed on article XXI of the GATT.62 2. Textual Ambiguity The controversy inherent in the security exceptions clause is reflected in the ambiguity of the format of the final text. This stems not only from the nature of national security as a highly abstract but self-evident ambiguous symbol63 but also from the consideration that each and every country strives to balance trade openness and its essential interests. This ambiguity is manifested mainly in the high degree of abstraction of key terms and the absence of explanatory documents. There is no other clause across the entire WTO treaty system that fully explains the relevant terms. For instance, what are the ESI of a country? Who (the invoking member, the DSB or any third party) has the ultimate right to determine ESI, which are the Achilles’ heel of international law?64 This question leads to inevitable conflicts among members. At present, the security issues are especially diverse and complex. Threats in both traditional and nontraditional security fields are intertwined to create a newly insecure era.65 The issues associated with national security have been extended to “new frontiers”, such as economic security, trade security, and cybersecurity.66 According to the drafting history of the clause, the self-judging nature of the security exceptions clause appears to have been criticized from the beginning.67 Article XXI of the GATT and article 73 of the TRIPS both incorporate the relevant wording “it considers”, which is completely different from the “general exceptions” stipulated by article XX of the GATT and has caused extensive discussion among 60

E/P/C/T/A/SR.33, p. 5. C.6/SR.37, p.3. 62 MTN.GNG/NG7/W/16, Special Distribution, 18 August 1987, pp. 1–8. 63 A. Wolfers: “National Security as an Ambiguous Symbol”, Political Science Quarterly, Vol. 67, No. 4, 1952, p. 498. 64 See Hannes L. Schloemann and Stefan Ohlbuff, ‘Constitutionalizing’ and Dispute Settlement in the WTO: National Security as an Issue of Competence, American Journal of International Law, Vol. 93, 1999, p. 426. 65 Larry Eliott and Dan Atkinson: The Age of Insecurity, (Cao Dapeng trans. The Commercial Press, 2001), p. 1. 66 See Jaemin Lee: “Commercializing National Security: National Security Exceptions’ Outer Parameter under GATT Article XXI”, Asian Journal of WTO & International Health Law & Policy, Vol. 13, 2018, p. 81. 67 See Micheal J. Hahn, Vital Interests, and the Law of GATT: An Analysis of GATT’s Security Exceptions Clause, Michigan Journal of International Law, Vol. 12, 1991, pp. 568–569. 61

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scholars.68 In particular, the jurisdictional basis of the DSB is also subject to the conclusion of this issue.69 As the only restrictive language in the security exceptions clause, “necessary” has received less attention from academia. In the past, the practice of the DSB has been to analyze the content of “necessary” in article XX of the GATT, and the most important criterion is to consider the urgency of the purpose of protection, the proportionality between the protected purpose and the means, and whether there are alternative measures that can achieve the same effect but lead to less restrictive impacts on free trade. However, compared with article XXI, the strength and discretion of the invoking party under article XX of the GATT are relatively weak, and there remains uncertainty regarding whether the relevant standards can be directly applied to article XXI of the GATT. Finally, regarding the interpretation of “emergencies”, international law customarily recognizes that states can temporarily deviate from their international obligations based on “national emergencies” and even are not limited to military measures and acts of war.70 However, as a highly subjective concept, “emergency” not only requires examining all the facts in the current domestic situation of the invoking party but also considering its overall emergency response mechanism, government governance competence, and the ability of executive personnel to deal with the situation, which may become a case-by-case issue. A plausible explanation is that the creators of the security exceptions clause deliberately muddied the above concepts because of their political sensitivity. This chapter agrees that sometimes, under certain special circumstances, when facing complex issues in international relations and attempting to conclude an international treaty

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Judging from the text itself, it appears that the judging subject should only be the invoking party, which is consistent with the view of the United States. However, if it can be logically deduced that members are allowed to enjoy an absolute “self-judging” right and can arbitrarily invoke this article to exempt themselves from their obligations without any supervision and review, it will inevitably lead to reckless unilateral abuse of this article by countries and ultimately make the multilateral trading system “live in name only”. 69 On the question of whether the safety exception case can be reviewed by the panel, the United States has expressed an extremely conservative view in the third-party opinions in both cases: “Saudi cites… the security exceptions is not renewable and therefore the issue cannot be the subject of a committee hearing.” [See DS567, Response of the United States to Panel Question No., para. 25-28.] The United States has also proposed that the security exception clause is a “self-judging provision”. It is up to the parties to determine the “existence of an emergency in international relations”, in part because the phrase “it considers necessary” in the preamble should apply to all subparagraphs (i)-(iii). [DS567, United States’ third-party submission, para. 5; and United States’ third-party statement, paras. 5 and 7.] The United States emphasizes that since Article 3.2 of the DSU requires the panel to use the rules of interpretation of public international law to apply each WTO legal agreement, then the semantics of the context should also be used to determine that subparagraph (b) is a self-judging clause. 70 See Surya P. Subedi, International Investment Law: Reconciling Policy and Principle, translated by Lei Zhang, Second Edition, Law Press, 2015, p. 200.

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or agreement as soon as possible, the legal text must have a certain degree of ambiguity.71 The security exceptions clause is likely to use this “constructive ambiguity” in international law to harmonize the differentiated opinions of contracting parties about the text at the highest level and strive to maintain flexibility for legal practice and subsequent developments. B Inherent Balance 1. The Overall Balance Philosophy of the Security Exceptions Clause Historical records have illustrated that in the early stages of negotiation of the GATT, the contracting parties were prudential in how to stipulate this significant exception. In fact, the parties needed a provision that was genuinely secure but not unreasonable.72 On the one hand, some contracting members insisted that a member should reserve the ultimate right to interpret the security exceptions clause,73 but on the other hand, other contracting members insisted that the clause should be restrained from possible abuse.74 When the security exceptions clause was finally incorporated into the ITO Charter, a majority voted in favor of clamping down on members’ discretion.75 From this perspective, the design philosophy of article XXI is to take the security exceptions clause as the balance of negative impact incurred on behalf of trade liberalization, and ESI are regarded as the second-level balance of the possible abuse 71

See Yichou Han, Research on “Constructive Ambiguity” in international law, Studies in Law and Business, No. 6, 2015, p. 171. 72 One of the original negotiators of the Havana Charter pointed out, “We gave a good deal of thought to the question of the security exception which we thought should be included in the Charter. We recognized that there was a great danger of having too wide an exception and we could not put it into the Charter, simply by saying: ‘by any Member of measures relating to a Member’s security interests,’ because that would permit anything under the sun. Therefore we thought it well to draft provisions which would take care of real security interests and, at the same time, so far as we could, to limit the exception so as to prevent the adoption of protection for maintaining industries under every conceivable circumstance… there must be some latitude here for security measures. It is really a question of balance. We have got to have some exceptions. We cannot make it too tight, because we cannot prohibit measures which are needed purely for security reasons. On the other hand, we cannot make it so broad that, under the guise of security, countries will put on measures which really have a commercial purpose. The Chairman of Commission A suggested in response that the spirit in which Members of the Organization would interpret these provisions was the only guarantee against abuses of this kind.” [See PCT/A/PV/33, pp. 20–21 and Corr.3; see also EPCT/A/SR/33, p. 3. Also see Petros C. Mavroidis and Mark Wu, The Law of the World Trade Organization (WTO): Documents, Cases and Analysis, West Academic Publishing, 2010, p. 725.] According to Kenneth J. Vandevelde’s study of internal files during the negotiation of the International Trade Organization’s charter, there are two different attitudes among representatives of the parties on whether the relevant factors of the security exception clause are subject to ITO supervision and whether members can invoke the security exception clause to be immune to their obligations under the ITO. [See Kenneth J. Vandevelde, The First Bilateral Investment Treaties: U.S. Postwar Friendship, Commerce, and Navigation Treaties, Oxford University Press, 2017, pp. 145–154.]. 73 See Kenneth J. Vandevelde, The First Bilateral Investment Treaties: U.S. Postwar Friendship, Commerce, and Navigation Treaties, Oxford University Press, 2017, p. 148. 74 See Kenneth J. Vandevelde, The First Bilateral Investment Treaties: U.S. Postwar Friendship, Commerce, and Navigation Treaties, Oxford University Press, 2017, p. 149. 75 See WT/DS512/R, para. 7.94.

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of members attempting to use the “two-tier balance” mechanism to achieve the optimized arrangement to the greatest extent possible. 2. Balance of the Text of the Security Exceptions Clause Paragraphs 1 and 2 of article XXI regulate actions taken by contracting members to safeguard their ESI, which composes the “genuine” national security exceptions clause. By contrast, paragraph 3 regulates actions taken to maintain international peace and security, which constitutes an exception of “international peace and security”. The idea of the content design of article XXI is that matters with loose invoking conditions usually cover narrower and more specific contents, while matters covered by more abstract and flexible content usually have harsher invoking conditions, balancing between the content and invoking conditions. For example, paragraph 1 has the most lenient conditions for invocation;76 however, this provision is limited to refusing to disclose specific information, and the disputes that may arise in practice are relatively rare.77 Paragraph 2, correspondingly, is the longest and most complicated in structure, broadly authorizing a member to take any action “it considers” necessary to protect its essential national security interests at the expense of providing three specific situations and balancing the general discretion of members. 3. Practical Balance of Members’ High Restraint in Invoking the Security Exceptions Clause In the GATT era, there were 5 cases relating to the security exceptions clause, 4 of which entered the stage of the panel’s review, but none of them provided a specific explanation or clarification of the clause.78 In the WTO era, before the Russia Transit Case, there was no dispute that invoked article XXI of the GATT for justification. The security exceptions clause has rarely been invoked over a long period, due not only to its being an overly abstract and vague concept but also to too much broad discretion being granted to a member,79 which may strike a devastating blow against the multilateral trading system. To avoid this damage to the overall balance of the GATT/WTO, all members generally exercise great self-restraint in invoking this “privileged” clause;80 therefore, in practice, all members behave in a highly modest and practical manner to balance the possible negative impact of the security exceptions clause on free trade.

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The claimant believes that the disclosure of certain information would be contrary to its essential security interests. 77 See Zhixiong Huang, Challenges Facing the Security Exception of the WTO and China’s Strategies —Taking the Issue of Cybersecurity as the Main Background, Journal of International Economic Law, No. 4, 2014, p. 144. 78 Most of the four cases involved civil wars, trade sanctions and similar circumstances. 79 Contrast the preamble to the nondiscretionary nature of article XX of the GATT. 80 See Wei Li, On the Issues of Applying WTO Provisions of Security Exception under the New Security Circumstance, Journal of Shanxi University (Philosophy & Social Science), Vol. 38, No. 6, 2015, p. 110.

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Through the elaborate textual design by the founders of the GATT/WTO and repeated negotiations and consultations among the members, the GATT/WTO security exceptions clauses have been dormant for a long period, providing a sense of predictability for promoting trade liberalization and facilitation, but the hidden dangers buried in security exceptions clauses have not been properly resolved. Moreover, the era of the WTO today is substantially different from the era in which the articles were drafted, and the tension between the relative stability of the treaty and the adaptation of the times has become increasingly prominent. Restricted to the complicated procedures for the amendment of GATT/WTO clauses and the rigid voting mechanism under the “principle of consensus”, members cannot even achieve a new balance by revising the security exceptions clause in a timely manner. Members may expect the treaty to evolve through the subsequent practice of the dispute settlement mechanism, but in reality, this puts the DSM under the pressure of “judicial law-making” or “judicial activism”. The subsequent stagnation of the development of the clauses, the absence of treaty interpretation, and the lack of power of the DSB to interpret the law together will result in more challenges in the future.

4 A Multidimensional Investigation of the More Balanced Approach to the Security Exceptions Clause After World War II, the main theme of the international community was war and peace, and people all over the world were eager to build an international economic and political order of peace and security without wars. For the sake of state sovereignty, the GATT set up article XXI as a “safety valve”. If their political security or national defense are not threatened, states will not be inclined to implement this article. However, since the 1990s, national security has begun to show a “dynamic and continually evolving” trend,81 and the topic of traditional security has gradually transitioned to that of nontraditional security. In 2004, a report released by the United Nations High-Level Group titled Threats, Challenges and Change, A More Secure World: Our Shared Responsibility, identified and listed six kinds of security challenges.82 Except for the “conflicts among countries” in the second and third challenges, the others are all nontraditional security. Recently, the accelerated development of nontraditional

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OECD Security-Related Terms in International Investment Law and in National Security Strategies 11 (2009), available at https://www.oecd.org/daf/inv/investment-policy/42701587.pdf (last visited on Apr.15, 2022). 82 The six types of security mentioned in the report are (i) poverty, infectious disease and environmental degradation; (ii) conflict between and within states; (iii) nuclear, radiological, chemical and biological weapons; (iv) terrorism; (v) transnational organized crime; and (vi) sanctions, at https:// undocs.org/zh/A/59/565 (last visited on 30 April 2022).

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security matters, such as networks, data, health, and the environment, has exacerbated the overall concern of the international community for the “risky society”.83 At the same time, the United States and the European Union, as active promoters of globalization in history, have experienced a wave of populism and antiglobalization. These countries have changed their major policy stance, significantly strengthening the function of “national security” in legislation and practice, combining economic interests, industrial interests, technical leadership, and other traditionally marketcompetitive matters with national security,84 and even deeming the invocation of national security a “cost-optimized” option for deviating from treaty commitments or taking special regulatory measures. Changes in countries’ understanding and cognition of security exceptions clauses has not only converted the nature of such a clause from a “passive defense” clause to an “active” or even “aggressive” clause but also shifted its main application scenarios from preventing actual risks to preventing potential risks,85 showing a kind of precautionalism. At the level of international organizations, the DSM has been attempting to carefully balance interests between countries and even between international organizations and their members. It tends to hold a more moderate rather than aggressive attitude toward handling cases involving the security exceptions clause. Although on the surface, an international organization should “respect the interests of all parties”, its primary purpose is to maintain and retain members within the multilateral framework to the greatest extent possible. On the one hand, it is not impossible that the DSB may deny an individual member’s right to explain its ESI; on the other hand, it is prudent to reserve certain necessary review power for itself. This contradiction has further aggravated the paradox of the security exceptions clause. Considering the subversive changes of the world’s economic and political order, the application scenarios and understanding of the contexts of national security have also undergone fundamental adjustments. The connotations and extension of the concept have evolved rapidly, and the incompatibility between traditional security and the abstract security exceptions clause is becoming increasingly apparent. Is it necessary to make corresponding dynamic adjustments and developments to the 83

As globalization accelerates, risks are easy to generate and difficult to predict, estimate and control, which means that risks are often objective evidence determined based on subjective perceptions and are sometimes even impossible to accurately identify and assess. This has intensified the differentiation of systems and policies among countries. 84 The U.S. Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) significantly expanded the review authority of the Committee on Foreign Investment in the United States (CFIUS), especially in relation to standards and procedures of review. On 19 March 2019, the EU promulgated the Regulations on Establishing the EU Foreign Direct Investment Review Framework (Regulations), which came into force on 11 October 2020. The Regulations were the first EU-level promulgated regulation of the review of foreign direct investment, which strengthened the review of the “safety” or “public order” of investment. 85 See Shuchun Wan, The Epidemic COVID-19 Accelerates Transformation of Trade Protectionism to National Precautionism: Inspirations from the Temporary Measures of French Customs, Review of Customs Law, Vol.10, 2021, p. 314. Yong Liang and Xinyu Xie. The Essential Security Interests Clause of International Investment Treaties in the Non-Traditional Security Era: Changes, Evolution and Justification, China Legal Science, Vol. 10, No. 3, 2022, p. 133.

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security exceptions clause itself? This chapter article points out three possible ways to improve the security exceptions clause according to the current state of development of international and national economic and trade relations. A. Establishment of Prerequisites for Invoking the Security Exceptions Clause While the founders of the GATT historically made informal resolutions that “contracting parties should be informed to the fullest extent possible of trade measures taken under Article XXI” and “all contracting parties affected by such action retain their full rights under the General Agreement”,86 there are currently no legal procedures within the WTO system for invoking the security exceptions clause. As mentioned above, if the possibility of indiscriminate abuse of the security exceptions clause continues to be ignored, it will certainly cause serious damage to the multilateralism system currently constructed by the WTO. In fact, regarding the jurisprudence behind the “principle of jurisdiction”, “principle of good faith” and “principle of proportionality” confirmed by the WTO panel in the Saudi IPR case, the ultimate purpose is to further limit and regulate members’ invocation of the security exceptions clause to prevent possible abuse. Both the “principle of good faith” and “principle of proportionality” are formulated from a substantive perspective. It is suggested that a procedural limitation of “due process” should be added to establish preconditions for the implementation of relevant measures, including the following: 1. Establishment of the Self-Restraint Prerequisites of the Invoking Party For instance, the invoking party may be required to conduct a “good faith” analysis of each constituent element specified in the security exceptions clause before taking corresponding actions, issue an assessment report to confirm the existence of “other emergency in international relations”, and explain how the current situation threatens its ESI, what kind of ESI are threatened, and how the actions under consideration can properly protect its ESI. The possible criteria include but are not limited to whether these purposes or objectives are appropriate, whether the disputed action is the only feasible way to protect ESI, and whether the member has attempted to minimize the negative impact upon other parties. When possible accidental events are taken into account, the formal integrity requirements of such assessment reports and information disclosure should also be allowed to be reduced, but the investigated and confirmed facts should themselves be sufficient. Moreover, such materials could be utilized by members in subsequent dispute settlement procedures to demonstrate their articulation of ESI and may also be helpful for members to persuade the panel to rule favorably. At the same time, the assessment process itself can send an early warning to potentially interested members or parties, reminding them to pay attention to the corresponding actions and to take appropriate actions to relieve the concerns of the invoking party to settle the dispute in advance or at least take necessary measures to reduce direct losses or indirect injuries as soon as possible. Moreover, if the relevant measures can be implemented in a hierarchical and step-by-step manner, 86

See GATT Council, Decision Concerning Article XXI of the General Agreement, Decision of 30 November 1982, BISD29S/23, 2 December 1982.

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the invoking party could also be required to evaluate the impact of the measures taken on the protection of ESI in real time, that is, to reevaluate after the implementation of each individual measure to prevent the adverse consequences of a “one size fits all” approach and diminish the effect of trade restrictions. 2. Establishment of Procedural Requirements Under these requirements, the invoking party should grant a grace period to persons who may be adversely affected by the action in its territory to stop losses or, in the case of time pressure, notify the other party immediately after the implementation of the measures so that the other party can fully understand the main expected issues and legal obstacles, that is, observe the “right to be informed” of the invoked party.87 In the GATT era, it was suggested that if the invoked party was a developing member, the invoking party should issue a special warning.88 In addition, the affected members should be allowed to obtain legal advice and assistance and provide channels for follow-up discussions on solutions to disputes in efforts to reach a settlement agreement. It is even possible to consider establishing a national “administrative procedure” for the review of disputed measures to resolve disputes quickly through local remedies. If a country’s domestic law provides for such a procedure, disputes may be resolved at the domestic level in advance without having to refer to the international level of WTO dispute settlement procedures. A dispute in which both parties are sovereign states may be detrimental to international peace and security, but if it can be resolved as a dispute in which one party is a private subject, the severity of the dispute and the cost of settlement will be greatly alleviated and reduced. 3. Establish Cooperative Requirements Between the Invoking Party and the WTO It is recommended that the invoking party notify the WTO immediately before taking the corresponding measures or after the implementation of the measures to draw attention to the tense situation and share data and information with the WTO, allowing the WTO to follow up on the latest progress of the measures adopted in real time. That requirement is, in fact, a requirement of transparency under WTO obligations. In 1982, the GATT Council made a resolution on the issue of invoking article XXI of the GATT, requiring that, with the exception of paragraph 1 of article XXI, members must take steps to notify the GATT as fully as possible. After obtaining relevant information, the WTO can also evaluate the impact of trade distortions in a timely manner or make certain suggestions and appeals to the relevant members. In addition, it may consider stipulating that the submitting member send information to the WTO. The communication with the WTO may be adopted by the panel in the subsequent process to enhance the member’s credibility in terms of “interpreting and applying the WTO agreement in good faith” and encourage members to comply with the procedures and formalities. 87

See Hua He, Research on Security Exceptions for Intellectual Property Protection Expanded by Article 73 of TRIPs, Peking University Law Journal, Vol. 31, No. 3, 2019, pp. 817–839. 88 See GATT Council, Minutes of Meeting Held on 29 May 1985, GATT Doc.C/M/188, 28 June 1985.

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As a “safety valve” of WTO obligations, the security exceptions clause provides the possibility for members to be exempted from their obligations under certain circumstances. If the existing content and structure of the security exceptions clause cannot be revised or amended in the short term, prerequisite procedures should be added. Thus, the start-up costs can be imposed on the invoking party to restrain that party from abusing the security exceptions clause to a certain extent. The “principle of good faith” and “principle of proportionality” must be incorporated into the design of the prerequisite procedures to enhance their roles in dispute settlement. B. Substantive Requirements for Improving the Security Exceptions Clause The improvement of the procedural conditions is essentially based on the “good faith” and “self-restraint” of the invoking party. However, in the context of current antiglobalization sentiments, some members have invoked the security exceptions clause to justify disputed measures more “actively” and “frequently”. To prevent the possible abuse of the security exceptions clause, it may also be necessary to improve the substantive requirements of the security exceptions clause. 1. Types of Expressions of New Developments of National Security At present, nontraditional security has not only risen to a position almost as important as that of traditional security but may also continue to expand and upgrade as technological, economic, and social developments advance. In this regard, it is suggested that based on the four elements of the establishment of a sovereign state, namely, residents, territory, sovereignty, and government, the two elements of national interests and sustainable development should be added. In addition, various types of national security should be classified and differentiated. For example, regarding core and urgent national security issues, such as ongoing military strikes, the DSB should respect the self-judging power of the respondent to the fullest extent. Unless the claimant can prove the respondent’s major malicious intent, the DSB will, theoretically, comply with its view that the relevant actions should not be judged. Regarding core and urgent national security issues, such as real economic crises or major health crises, the DSB should respect the self-judging power of the respondent to a great extent; in detail, the claimant should prove that the respondent is malicious or discriminatory, and at the same time, the DSB should moderately reduce the standard of proving the minimum satisfaction of measures. However, for information security, network security and other nontraditional security issues that have a key impact on economic and social development but are not urgent, the DSB should limit its respect for the self-judging power of the respondent, reduce the burden of proof of the claimant, and increase the respondent’s burden of proof regarding the necessity and proportionality of the measures. 2. The Preliminary Burden of Proof Imposed on the Invoking Party The WTO can clarify what key facts the invoking party must present for the burden of proof in the relevant circumstances, affirming that members can resort to exceptions by demonstrating that their domestic circumstances meet these standards. This standard of burden of proof can be flexible and based on case-by-case decisions, and

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the main purpose is to allow members to consider potential legal costs and expenses when invoking the security exceptions clause. That is, the members should consider how to maximize the justification of the measures in international law and be forced to provide informative and quantifiable standards for exemption from obligations, which could provide a certain reference for subsequent panels in the future dispute settlement. 3. Establishment of the Assessment Mechanism for Security Exceptions If a member seeks a temporary exemption, the WTO multilateral trading system should strengthen its capabilities of information retrieval and collection and broaden its channels for verifying the seriousness of the domestic situation of the invoking party, thus avoiding abuse and ensuring that urgent facts are not exaggerated, leading to asymmetry of information. For example, when a member invokes the security exceptions clause for the sake of data security or network security, the panel may obtain information from other member governments, nongovernmental entities, or international organizations to establish a cooperative mechanism for WTO review under special circumstances. It should aim to comprehensively assess and weigh relevant evidence, carefully balance the rights and obligations of WTO agreements, and ensure the rationality of its rulings. C. Establishment of a Domestic Mechanism for Invoking the Security Exceptions Clause As a common principle in the legal systems of various countries, the article holds that the principle of due process should not only be effective at the level of general international law but can be further applied to the construction of domestic mechanisms. While the final decision on whether to invoke the security exceptions clause rests with a member government, the economic consequences of invocation are often borne by private trade and investment entities of the country. Therefore, if the WTO considers the procedural legitimacy of further standardizing and restricting the invocation of the security exceptions clause, the voices and positions of interested domestic groups that have been long ignored could play an important role. After all, outer restraints on members are still limited, and the WTO must attempt to form a “self-restraint” force from within its members. In fact, when a member intends to invoke the security exceptions clause, it will face not only external pressure from other members and the WTO but also opposition from domestic interested groups or other interested parties. The domestic interested groups’ opposition may evolve into serious political issues.89 Therefore, members can attempt to construct an analogous administrative hearing procedure in the form of statutory law and fully reflect and respond to the opinions of the international community, social entities and relevant interested groups before making a final ruling to further establish the formal legitimacy of invoking the security exceptions clause.

89

See Brewster, Rachel, The Domestic Origins of International Agreements, Virginia Journal of International Law, Vol. 43, 2003, p. 503.

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5 China’s Attitudes Toward Coordinating and Promoting a More Balanced Security Exceptions Clause Currently, the world is facing unprecedented changes and challenges.90 In April 2014, the first meeting of the Central National Security Committee put forward the concept of a holistic view of national security, made it clear that the committee should pay attention to both traditional and nontraditional security issues, and planned to build an overall national security system incorporating political security, homeland security, military security, economic security, cultural security, social security, scientific and technological security, information security, ecological security, resource security, and nuclear security.91 Among the eleven types of security mentioned above, only political security, homeland security, military security and nuclear security are traditional types, and the other seven types are basically nontraditional security. Developing a holistic view of national security provides a strategic direction for future relevant legislation. Furthermore, since 2020, China has actively promoted an all-around approach by coordinating domestic rule of law and foreign-related rule of law. In the field of economic and trade law, domestic rule of law is reflected mainly in the comprehensive implementation and systematic design of nontraditional security, while foreign-related rule of law is reflected more in the integration of the “common, comprehensive, cooperative and sustainable view of security” into international treaties and legal practices. Specific examples follow. A. The Holistic View of National Security and the Change in Trade Liberalization and Investment Promotion China’s new concepts of international law, such as “a community with a shared future for humankind” and “extensive consultation, joint contribution and shared benefits”, emphasize a holistic view of various problems and contradictions faced by human society, which is consistent with the idea that nontraditional security usually goes beyond the jurisdiction of one country’s traditional sovereignty and requires more cooperation between or among countries. Under the guidance of the holistic view of overall national security, and considering nontraditional security from a dynamic and developmental perspective, seeking maximum cooperation is the inevitable course to resolve nontraditional security issues. Article 2 of the 2015 National Security Law of the People’s Republic of China (NSL) stipulates that the regime, sovereignty, unity, territorial integrity, welfare of the people, sustainable economic and social development and other major interests of the state should meet two obviously preventive conditions of “relatively not faced 90

See Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning Adhering to and Improving the Socialist System with Chinese Characteristics and Promoting the Modernization of the National Governance System and Governance Capability, p. 4. 91 According to the overall national security system of China, in addition to the aforementioned 11 types of security, another 5 types of security, overseas interests security, biological security, outer space security, polar regions security and international seabed areas security, are included.

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with any danger and not threatened internally or externally” and “the capability to maintain a sustained security status”. Although limited by the wording “relatively”, due to the great flexibility of the concept of national security, this type of restriction has a limited effect in practice. Article 8 of the NSL clearly places nontraditional security in the same legal category as traditional security, and in articles 15 to 34, 16 types of national security are regulated in sequence, and their respective regulatory priorities are clarified. In addition to the NSL, specialized legislation on nontraditional security, such as the 2016 Cybersecurity Law of the People’s Republic of China, the 2020 Biosecurity Law of the People’s Republic of China, the 2021 Personal Information Protection Law of the People’s Republic of China and the 2021 Data Security Law of the People’s Republic of China, have been promulgated and implemented in succession, fully coordinating and connecting with the holistic view of national security and the NSL. China’s current legal policies and practices have basically formed an “umbrella structure” with the holistic view of national security as a strategic guide, the NSL as an overall control, and a series of laws concerning specific types of security as content. It is a systematic improvement and strengthening of China’s national security under the concept of attaching equivalent to “development” and “security”. Concurrently, the promulgation and implementation of the 2019 Business Environmental Optimization Regulations strengthened China’s basic position of improving the business environment on an independent basis. Since the 2021 Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures and 2021 Law of the People’s Republic of China on Anti-Foreign Sanctions (AFSL) were promulgated and implemented, although China’s security protection stance has been further emphasized, the policy of exercise with restraint in practice shows that the Chinese government will still regard invoking the security exceptions clause as a defensive measure of the last resort to exempt itself from its international obligations or commitments. B. Security Exceptions Clauses in China’s Economic Treaties Although article XXI of the GATT established the “blueprint” of the security exceptions clause, security exceptions provisions in China’s trade and investment treaties are differentiated and even fragmented. 1. Security Exceptions Clauses in China’s Free Trade Agreements Among China’s signed 19 free trade agreements (FTAs) with 25 contracting parties,92 only the 2017 China-Maldives FTA cannot be found on the websites of the Ministry of Commerce of the P.R.C. or the United Nations Commission of Trade and Development (UNCTAD), and there is no security exceptions clause in 2002 China-ASEAN FTA (and subsequent agreements) and 2006 China-Pakistan FTA. The other 16 FTAs can be roughly divided into six categories: (1) Approach 1: The comprehensive economic agreements with Hong Kong (2003), Macau (2003) and Taiwan (2010) 92

http://fta.mofcom.gov.cn/list/chinamedfen/chinamedfennews/1/encateinfo.html (last visited on 23 May 2022).

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permit only exception measures consistent with the rules of the WTO; (2) Approach 2: article XXI is directly incorporated as a security exceptions clause in China’s FTAs with Chile (2005), Peru (2009), Costa Rica (2010), Iceland (2013) and Switzerland (2013); (3) Approach 3: 2008 China-New Zealand FTA adopts article XXI of the GATT as well as procedural requirements for notification;93 (4) Approach 4: 2008 China-Singapore FTA and 2020 Regional Comprehensive Economic Partnership (RCEP) adopts article XXI of the GATT as well as critical public infrastructure;94 (5) Approach 5: In recent signed FTAs with Korea (2015), Australia (2015), Georgia (2017) and Cambodia (2020), both article XXI of the GATT and article XIV bis of GATS were incorporated into and made part of the FTAs; and (6) Approach 6: The 2019 China-Mauritius FTA incorporates paragraph 1 and paragraph 3 of the article XXI but excludes the most challenged and controversial paragraph 2.95 In summary, all of China’s FTAs take article XXI as the “blueprint” or “symbol”. Due to the similarities of article XXI of the GATT and article 14 bis 2 of the GATS, only the 2008 China-New Zealand FTA, 2008 China-Singapore FTA and 2020 RCEP have made some reforms, with the former improving the procedural requirements and the latter expanding the coverage of security exceptions to critical public infrastructure. 2. Security Exceptions Clauses in China’s Investment Treaties Compared to security exceptions clauses in China’s FTAs, the security exceptions clauses in China’s bilateral investment treaties (BITs) are more diversified. They can be divided into four categories: (1) Approach 1: The early Chinese BITs signed with Singapore, Sri Lanka, New Zealand and Martinus in the 1980s and 1990s contain “prohibitions and restrictions” clauses expressly permitting a party to take any measure to protect its ESI according to the “prohibitions and restrictions” demonstrated in the BITs.96 (2) Approach 2: Terms and phrases such as “without relaxing health, safety and environmental measures of general application” and “respecting the sovereignty and laws of the Contracting Party within whose jurisdiction the investment falls” were incorporated into the preamble of Chinese BITs signed with Trinidad and Tobago and with Guyana at the beginning of the twenty-first century.97 According to customary international law, the preamble is not binding but provides a dynamic interpretation approach for future dispute resolution. (3) Approach 3: 93 Paragraph 2 of article 201 of 2008 China-New Zealand FTA, Source text: The FTA Joint Commission shall be informed to the extent possible of measures taken under subparagraphs 1(b) and 1(c) and of their termination. 94 Article 106 of 2008 China-Singapore FTA, Source text: critical public infrastructure, including critical communication infrastructure, from deliberate attempts intended to disable or degrade such infrastructures. 95 Article 16.2 of 2019 China-Mauritius FTA. 96 Article 11 of 1985 China-Singapore BIT (Prohibitions and Restrictions) stipulates, “The provisions of this Agreement shall not in any way limit the right of either Contracting Party to apply prohibitions or restrictions of any kind or take any other action which is directed to the protection of its essential security interests, or to the protection of public health or the prevention of diseases and pests in animals or plants.” There are similar provisions in article 11 of 1986 China-Sri Lanka BIT, article 11 of 1989 China-New Zealand BIT and article 11 of 1996 China-Mauritius BIT. 97 See the preamble of 2002 China-Trinidad and Tobago BIT and 2003 China-Guyana BIT.

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Relatively comprehensive security exceptions or similar provisions have been incorporated into China’s BITs signed with Canada, Turkey, Japan, South Korea and some contracting parties in recent years. (4) Approach 4: Actions for the protection of its ESI or in circumstances of extreme emergency “in accordance with its laws normally” and “reasonably applied on non-discriminatory basis” in the 2006 China-India BIT (terminated). Since the first and second modes of the clauses were relatively crude and immature and have been supplanted or succeeded in subsequent BITs, this chapter will focus more on the third and fourth approaches to security exceptions clauses. The security exceptions clauses in China’s BITs can be summarized as follows. 1. No Definite Provision on Whether the Third Party’s Right to Review Is Excluded. The texts of China’s BITs are fragmented. For instance, the 2012 China-Canada BIT basically transplanted article XXI of the GATT98 while placing it in article 33 (General Exceptions), and the 2015 China-Turkey BIT allows a contracting party to take measures that it considers necessary to protect information security and fulfill its obligation to maintain international peace and security99 and also places it under article 4 (General Exceptions). The 2012 China-Japan-Korea Trilateral Investment Agreement was the first time that China incorporated an independent security exceptions clause, and paragraph 1 of article 18 (Security Exceptions) allows a contracting party to take measures “it considers necessary for the protection of its essential security interests” or “in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security”. Similarly, the RCEP text also adopts the wording “self-judging” but does not explicitly exclude the third party’s right to review. 2. Differentiated Expressions of the Concept of ESI Among China’s BITs, the security exceptions clause is highly fragmented. There are differentiated expressions, such as ESI,100 substantial security interests,101 security 98

Paragraph 5 of article 33 of the 2012 China-Canada BIT stipulates, “Nothing in this Agreement shall be construed: (a) to require a Contracting Party to furnish or allow access to any information if the Contracting Party determines that the disclosure of that information is contrary to its essential security interests; (b) to prevent a Contracting Party from taking any actions that it considers necessary for the protection of its essential security interests: (i) relating to the traffic in arms, ammunition and implements of war and to such traffic and transactions in other goods, materials, services and technology undertaken directly or indirectly for the purpose of supplying a military or other security establishment, (ii) in time of war or other emergency in international relations, or (iii) relating to the implementation of national policies or international agreements respecting the nonproliferation of nuclear weapons or other nuclear explosive devices; or (c) to prevent a Contracting Party from taking action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.”. 99 Paragraph 2 of article 4 of 2015 China-Turkey BIT. 100 Paragraph 5 of article 33 of 2012 China-Canada BIT and the Paragraph 2(a) of article 4 of 2015 China-Turkey BIT. 101 Paragraph 1(a) of article 18, of the 2012 China-Japan-Korea Trilateral Investment Agreement adopts the wording of “substantial security interests (实质安全利益)” in the Chinese text, while it still uses ESI in the English version. Because the 2012 China-Japan-Korea Trilateral Investment

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and public interest,102 and security or national interests.103 The RCEP first explicitly incorporates the nontraditional security of critical public infrastructure into the coverage of ESI. Although nontraditional security can theoretically be covered, the differentiated expressions hinder the connotations and extension ESI in China’s BITs from forming a relatively stable “public order”. Recently, the security exceptions clauses in the economic and trade treaties signed by China have contained requirements of necessity, but there are no specific and consistent standards on whether the disputed measures should meet the requirements of nondiscrimination, nonarbitrariness, proportionate effect and purpose, and temporality. Before the 2010s, only a few of China’s BITs incorporated security exceptions clauses. The recently concluded BITs have generally included this clause, but there are still some differences in the arrangement and contents of the clauses, reflecting both that China has not yet formed a stable acknowledgment of the clause and China’s high flexibility in treaty negotiations with foreign countries. At any rate, once a treaty concluded by China comes into force, it constitutes China’s international legal obligations. A vague and highly abstract security exceptions clause may not only leave a member at a loss regarding what to do when faced with specific issues in actual disputes but may even accelerate divergence between parties and exacerbate differences between international economic and trade treaties. For this reason, the improvement of the security exceptions clause should be a systematic and long-term project. China should not only consider the stability and relative compatibility of the clause itself but also pay attention to effectively connecting it with the preamble and principles of interpretation to ensure that when disputes emerge in the future, the clause can be interpreted and applied in a relatively stable scenario. C. Improvements in Security Exceptions Clauses in China’s Economic and Trade Treaties To better cope with the “modernization” and “expansion” of the connotations and extension of national security by nontraditional security issues, the Chinese government should respond to the needs of the nontraditional security era in a timely manner and consider China’s realities and long-term interests to reconstruct security exceptions clauses in international economic and trade treaties. 1. Relative Unity of Expression of Security Exceptions Clauses Only a few of China’s existing international economic and trade treaties have incorporated security exceptions clauses, but the expressions differ significantly. Except for the 2012 China-Japan-Korea Trilateral Investment Treaty and the RCEP, no selfjudging wording is included in these treaties. This will reduce the “room” that the Chinese government has to invoke this clause to justify any disputed measure in future dispute resolution. It is suggested that when China signs economic and trade Agreement was finalized in the English language, the English version shall prevail when it conflicts with the Chinese version. 102 Paragraph 1 of article 4 of 1984 China-BLEU (Belgium-Luxembourg Economic Union) BIT. 103 Paragraph 2 of article 4 of 2005 China-BLEU (Belgium-Luxembourg Economic Union) BIT.

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treaties with other countries, the expression of the security exceptions clauses should be unified, self-judging words should be clearly included, and the composite model of “nonexhaustive enumeration” and “national security features” should be adopted in the design, thereby strengthening the basis for China’s exercise of discretion as the invoking party. 2. Specific Stipulations for Core Non-Traditional Security Matters Compared with traditional security, nontraditional security not only has greater flexibility and instability in its connotations and extension but also tests the host state’s governance capabilities and the effect of international cooperation on prevention and response. To avoid excessive fragmentation of the understanding and application of nontraditional security matters, it is recommended that the core nontraditional security matters generally recognized by the international community, such as data security and network security, be directly expressed in newly signed economic and trade treaties, and it is expected that the consensus of the international community on core nontraditional security matters will be formed through treaty practices. Furthermore, the common concerns of the contracting parties can also be explicitly included in the same way that the RCEP clearly lists key public infrastructure issues. 3. A Clear Expression of the Moderate Third Party’s Right to Review In the context of the gradual decline of neo-liberalism and the willingness of countries to cooperate with each other, the security exceptions clause, as a highly selfinterested clause, is easily invoked by a few countries to deviate from treaty obligations in a cost-minimizing manner. Therefore, while respecting the discretionary power of relevant countries on matters of essential security interests, key areas and even the “new frontiers” of nontraditional security, it is also necessary to confirm the competent jurisdiction of the third party over the relationship between special measures or actions taken by the respondent and the alleged ESI, thereby restraining the respondent’s possible abuse of the security exceptions clause. 4. Moderate Enhancement of the Relationship Among the Preamble, Substantive Obligations, and Security Exceptions Clauses Although the contents that “do not derogate from the security of the host state, respect for the sovereignty and laws of the host state” included in the preamble of international treaties provide a certain reference for the interpretation of ESI, the preamble itself is not mandatory and binding and mainly serves as a reference for interpretation of the object and purpose of the treaty. It is suggested that when China intends to incorporate security exceptions clauses into future treaties, it should include the goals of respecting the economic sovereignty of the contracting states and promoting sustainable development in the preamble and ensure the necessary elasticity and tension of security exceptions clauses through a systematic arrangement that connects security exceptions clauses with the preamble and substantial obligations. D. The Chinese Discourse of Dispute Resolution Practice with Security Exceptions Clauses

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In the era of nontraditional security, to prevent and respond to various unexpected risks, in addition to fully considering and embodying various types of traditional security and nontraditional security in treaties, China should continue to regard security exceptions clauses as a defensive “last resort” in the toolkit rather than an active offensive “weapon” in trade regulation. 1. The perspective of the Chinese government as the complainant It cannot be denied that national security seems to be the protean norm du jour in international economic law today.104 In practice, some of China’s legitimate trade and investment interests have been injured by the extraordinary regulatory measures taken by some countries in the name of protecting national security, most of which are related to nontraditional security. The situation has become worse since 2020, and the U.S., India and other countries have banned or restricted the operation of certain Chinese apps within their borders for data security reasons.105 China should 104

On 23 March 2018, the U.S. Trump administration imposed a 25% tariff against approximately US$60 billion of imports from China, 15 days after the United States imposed tariffs on imports of steel and aluminum (25% on steel imports and 10% on aluminum imports) from around the world. President Trump accused China of “economic aggression” and left the door open for negotiations with all states to force them to take measures to eliminate the U.S. “US$800 billion trade deficit with the world”. China subsequently announced preliminary retaliatory tariffs against over $3 billion in U.S. products, such as apples, steel, and pork, even as US Treasury Secretary Steve Mnuchin stated that the tariff wars were part of the U.S. negotiation strategy with China. Even as WTO Director General Roberto Azevedo cautioned against the impact of such a trade war on the global economy, the WTO did not deny that under article XXI(b)(iii) of the GATT, the United States could take “any action which it considers necessary for the protection of its essential security interests…taken in time of war or other emergency in international relations.” President Trump’s two presidential proclamations declaring tariffs against aluminum imports and steel imports refer heavily to the impairment of U.S. national security interests as the basis for imposing tariffs. See Diane Desierto: Protean ‘National Security’ in Global Trade Wars, Investment Walls, and Regulatory Controls: Can ‘National Security’ Ever Be Unreviewable in International Economic Law? See. https://www.ejiltalk.org/national-security-defenses-in-trade-wars-and-investment-walls-us-vchina-and-eu-v-us/(last visited on 20 May 2022). 105 On 6 August 2020, the United States issued Executive Order 13942, requiring a timelimited forced divestiture of TikTok’s (TikTok International) U.S. business for continuing to threaten the national security, foreign policy, and economy of the United States; otherwise TikTok would be prohibited from operating in the United States. Addressing the Threat Posed by TikTok, and Taking Additional Steps To Address the National Emergency With Respect to the Information and Communications Technology and Services Supply Chain, https://www.federalregister.gov/documents/2020/08/11/2020-17699/addressing-the-threatposed-by-tiktok-and-taking-additional-steps-to-address-the-national-emergency (last visited on 30 January 2022). After the TikTok ban sparked lawsuits from WeChat U.S. customers and TikTok, a U.S. federal court barred the implementation of the administrative injunction. On June 9, 2021, President Biden of the United States signed an executive order to revoke the previous administration’s ban on TikTok, WeChat (WeChat) and 8 other communication and financial software applications and instructed the US Department of Commerce to control the software of “foreign adversaries”. The application was assessed, and action was taken as appropriate, with temporarily manageable negative impacts. Executive Order on Protecting Americans’ Sensitive Data from Foreign Adversaries, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/09/ executive-order-on-protecting-americans-sensitive-data-from-foreign-adversaries (last visited on

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resolutely fight back against countries that may frequently invoke the security exceptions clause to seek the so-called justification to deviate from their commitments in international treaties and to prevent those actions from being further imitated and spreading, which may lead to a more unfavorable effect on China’s trade-exporting or investment-exporting activities. To defend its legitimate benefits, China should make sufficient deployments in the following aspects. (i) Appropriate initiation of the WTO dispute settlement mechanism In response to the possibility that a few countries may abuse the security exceptions clause to deviate from their treaty obligations, the Chinese government should appropriately activate the dispute settlement mechanism and attach importance to adopting the following strategies. First, moderately respect the invoking party’s authority concerning ESI, but advocate that a third party should have the right to review the disputed measures so that a balance of leniency and rigor can be achieved between the discretion of the invoking party on matters of ESI and whether the disputed actions/measures are necessary to safeguard its genuine ESI. Second, the burden of proof should be specified to ensure that there is a balance between respecting the sovereignty of other countries and defending the legitimate benefits of Chinese interested parties. Third, sufficient evidence should be cited against the relationship between the disputed actions/measures and ESI, the proportionality between the purpose and effect of the disputed actions/measures, minimum necessity, urgency and temporality, and sufficient attention should be paid to providing scientific evidence such as data to enhance the probative effect. (ii) Self-restraint initiation of unilateral countermeasures If the third party improperly denies its jurisdiction or makes an improper ruling or the losing party fails to perform the ruling without justifiable reasons or even takes further actions against the Chinese entities or the Chinese government, including substantive sanctions against or stigmatization of China, it is obvious that the WTO dispute settlement mechanism will be unable to protect the legitimate benefits of China. Pursuant to the 2021 Anti-Foreign Sanctions Law, the Chinese government should adopt progressive jurisdiction and take reciprocal countermeasures to deter the invoking party when necessary.106 2. The perspective of the Chinese government as the respondent 30 January 2022). As of July 2021, India had banned more than 200 Chinese applications (apps) from operating in India and permanently prohibited 60 apps, including TikTok, Weibo, WeChat, QQ, and Baidu. See the list of 60 applications forbidden in India. 106 Article 12 of the 2021 AFSL stipulates, “No organization or individual may implement or assist in the implementation of discriminatory restrictive measures adopted by foreign countries against Chinese citizens and organizations. Where any organization or individual violates the provision of the preceding paragraph, infringing upon the lawful rights and interests of a Chinese citizen or organization, the Chinese citizen or organization may institute an action in the people’s court in accordance with the law to request the organization or individual to cease the infringement and compensate for losses.” Article 13 stipulates, “In addition to those provided for by this Law, the relevant laws, administrative regulations, and departmental rules may provide for other necessary countermeasures to be adopted against acts that compromise China’s sovereignty, security, and development interests.”.

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In previous economic and trade disputes, China has maintained great restraint in invoking security exceptions clauses. In the China-Rare Earths Case, although rare earths are critically strategic resources and are often used in the military or defense industry, the Chinese government did not invoke article XXI to justify the disputed measures in order to prevent activating the dormant monster of “national security” in international trade law. Certainly, if necessary, the Chinese government may take extraordinary regulatory measures to protect its ESI and attempt to invoke the security exceptions clause to justify such disputed measures in the future; however, China should still refer to the following principles. (i) Self-restraint in invoking the security exceptions clause Although invoking the security exceptions clause to deviate from treaty obligations may be an effective method to minimize economic costs, excessive activation of this clause may cause disputes. In the short term, more disputes mean that the invoking state must pay more legal costs and expenses and worsen the domestic business environment. In the medium or long term, this situation could increase the cost of China’s future international cooperation, as the other contracting party could demand a higher price to cover China’s possible default by invoking a security exceptions clause. Therefore, the Chinese government should continue to maintain self-restraint in invoking the security exceptions clause and regard it as the last resort for defense in the toolkit. (ii) Systematic arrangements for taking extraordinary regulatory measures Even if extraordinary regulatory measures are necessary to protect ESI, the requirements of nondiscrimination, proportionality, and lowest restrictions should also be taken into account. Furthermore, once security risks are eliminated or mitigated, the extraordinary regulatory measures should be promptly terminated or lifted to guarantee the legitimate expectations of other parties and the mutual-benefit business environment. In addition to the full demonstration and arrangement of measures, a dispute prevention mechanism, complaint mechanism, mediation mechanism and other dispute prevention or resolution methods should be established to accompany dispute settlement so that the parties can resolve their disputes through alternative methods as soon as possible and then build a friendlier and more predictable business environment.

6 Conclusion On 30 November 2020, the last member of the WTO Appellate Body, Ms. Zhao Hong, delivered a farewell speech titled “Equal Justice under the Treaty”107 recalling the suspension of the Appellate Body members selection process since 2017 and calling 107

See Hong Zhao, Equal Justice under the Treaty-A Farewell Speech, Journal of International Economic Law, Vol. 2, 2021, pp. 1–13.

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for all WTO members to return to the WTO, a rule-oriented multilateral trading system. Although the WTO dispute settlement system, which was praised as “the jewel in the crown”, encountered unprecedented difficulties due to the elimination of Appellate Body members, the WTO trading system still exerts an important inertial impact on global trade. In the Russia Transit Case and Saudi IPR Case, the application of the WTO security exceptions clause was explored, showing preliminary signs of a certain fixed order of analysis. The findings are significant for WTO members that wish to explore the security exceptions clause and provide a reference for the backlog of pending cases. For the normal advancement of international trade relations and the relative stability and balance of the current international trade law system, the international community and contracting parties prefer to promote bilateral, plurilateral or regional rules. Therefore, in the context of multiple crises, reexamining the security exceptions clause and deciding the possible and key points of the rebalancing of national security will contribute to the overall orderly and sustainable development of international trade law. As China is the world’s second-largest economy, its understanding and position on the concept of national security may lead to great influence on the developments of the text and practice of security exceptions clauses in the future. That is why this chapter points out China’s standpoint and specific recommendations for a well-balanced security exceptions clause.

Trade Control and WTO Law: Examining the Adequacy of the GATT Exception Tao Du and Ziwen Ye

Abstract Individual states increasingly rely upon economic sanctions and sanctions with extraterritorial effects to achieve their foreign policy goals. However, the proliferation of economic sanctions, especially trade control, limits free trade between WTO members and targeted states, which urges them to question WTO consistency. For the WTO, the principal concern is sanction overreach and determining the legality of related trade measures under the WTO framework. Against this backdrop, this article analyses two potential justifications for trade control: invoking Article XX and Article XXI of the GATT 1994. The subsequent analysis focuses on the WTO consistency of the Anti-foreign Sanctions Law of the People’s Republic of China, particularly state practices, possible violations of WTO rules and invocation of the national security exception clause. Additionally, from the perspective of WTO rules, suggestions for the improvement of China’s anti-foreign sanctions regime are put forward. The conclusion emphasizes that the GATT exception cannot be used to justify all types of anti-foreign sanctions. Keywords Economic sanctions · Anti-foreign sanctions · WTO · GATT exception · National security exception

1 Introduction Sanctions can be categorized as military or nonmilitary sanctions. In classical international law, scholars have held different views on whether sanctions can be imposed by force, while in modern international law, military sanctions are explicitly prohibited. In classical international law, there were distinct perspectives on military sanctions. German jurist and historian Samuel von Pufendorf (2005), taking up the theories of natural law proposed by Grotius, concluded that nature is not backward in permitting people to turn even to force when they cannot by other means secure themselves from injuries and assaults. Lassa Francis Lawrence Oppenheim (1992), a German jurist T. Du (B) · Z. Ye International Law School, East China University of Political Science and Law, Shanghai, China e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Zhang and X. Tan (eds.), A Chinese Perspective on WTO Reform, https://doi.org/10.1007/978-981-19-8230-9_7

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and teacher of law, concluded that a country had no obligation to remain passive when another country infringed its legally protected interests under international customary law, justifying nonmilitary sanctions as countermeasures. In modern international law, the Charter of the United Nations (UN Charter) expressly forbids the threat or use of force against any nation in any manner that is not consistent with the purposes of the UN Charter (UN Charter art. 2, para. 4). In other words, the UN Charter does not address nonmilitary coercive measures, including economic sanctions. Given that economic sanctions tend to be the first option for coercive measures, such sanctions, particularly trade control, might be WTO inconsistent. In summary, the WTO consistency of trade-control measures urgently needs to be addressed. This article adopts WTO rules as the analytical framework to address the legitimacy questions surrounding trade restrictive measures and anti-foreign sanction policies. It proceeds as follows. Section 2 analyzes the legality of trade control in the context of international law. The purpose of Sects. 3 and 4 is to illustrate the difficulties and dilemmas encountered during the application of the General Agreement on Tariffs and Trade (GATT) public morals exception and national security exception and to rethink ways to effectively balance national interests and free trade in the context of global governance based on the WTO Panel decision. From the perspective of legislative theory, suggestions for the improvement of the Anti-foreign Sanctions Law of the People’s Republic of China (Anti-foreign Sanctions Law) are put forward in Sect. 5.

2 Trade Control: Legality Under International Law The term ‘economic sanction’ in this article refers to restrictive economic measures, including trade sanctions and financial sanctions, imposed on other nations to achieve foreign policy goals in accordance with domestic laws. Trade sanctions are also known as trade control or embargo, including export control and import control. Since the legality of economic sanctions is still controversial in international law, this section mainly discusses the legality of trade control, even in forms with extraterritorial effects, under the framework of international law norms and WTO rules.

2.1 Unilateral Economic Sanctions: Legality Under International Law Article 2(4) of the UN Charter proscribes ‘the threat or use of force…’ (UN Charter art. 2, para. 4), expressly prohibiting the use of military measures while not prohibiting the use of nonmilitary measures, including economic sanctions. If the word ‘force’ is considered to include coercive measures, then no country can use

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nonmilitary measures, including economic coercion. In arguing that certain types of nonmilitary measures may violate international law, various countries and scholars have differed in their views in this regard. The meaning of the word ‘force’ in this context, Bowett (1958), Jisong (2007) and other experts argued, should be limited to armed force. Moreover, Britain and the United States (US) explicitly opposed the inclusion of economic factors in the word ‘aggression’ (Thomas 1972). However, other countries and experts have argued that the word ‘force’ in this context should embrace economic measures. As Lee C. Buchheit noted, the principle stipulated in article 2(4) would be adjudicated with the maturity of coercive measures. In addition, Dr. Bowett (1972) suggested that economic measures may be unlawful when driven by an improper motive or purpose. Furthermore, Dr. Bowett (1976) and Dr. Shihata (1974) used General Assembly resolutions, taking the indications of a general customary law as evidence, to conclude that international law prohibits certain types of economic coercion. Additionally, some countries have presented notably varied appeals. Bolivia, the Soviet Union, the majority of Latin American states, Iran and eight African states proposed the inclusion of economic factors (Muir 1974; Stone 2022). For example, in 1945, Bolivia submitted a definition of ‘aggression’ that extended its meaning to economic measures; after that, in 1952, Bolivia suggested that the definition of ‘aggression’ that includes unilateral action to deprive a state of economic resources derived from the fair practice of international trade (United Nations General Assembly 1952). As previously discussed, arguments from the aforementioned states, officials and scholars imply that the UN Charter does not prohibit economic sanctions, although it could face significant challenges in justifying this lack of prohibition under evolving international law norms.

2.2 Trade Control: Legality Under International Law Another question that arises is whether trade control, as one type of economic coercion, is prohibited. Just because ‘force’ under article 2(4) has been construed as not including economic coercion, it does not mean that certain types of trade control may not violate other international law norms. Since the right to control foreign trade is frequently applied for political purposes based on economic or military conditions (Muir 1974), the question is whether import regulations, including imposing tariffs, inspections, quantitative and qualitative restrictions, and numerous other conditions and barriers to international trade, become illicit when directed against a particular country or countries for purposes of diplomatic pressure (Muir 1974). For example, following the renewal of warfare between Ukraine and Russia in February 2022, Western countries imposed US-led trade control in technology of the military and aerospace sectors, restricting the export of semiconductors, telecommunication, encryption security, lasers, sensors, navigation and maritime technologies to Russia (Further Imposition of Sanctions 2020). Thus, the exporting countries could exercise their discretion in selecting clients based on political or economic grounds.

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Scholars have different views on this issue. Proponents argue that foreign trade has traditionally been a matter of national sovereignty (Hyde and Wehle 1933; Lauterpacht 1933). In other words, the regulation of foreign trade is normally a right that is within the sovereign prerogatives of an independent country (Lillich 1975). In international customary law, states have rights to control trade relations properly, as Porotsky noted in support of this argument. Here, conventional wisdom holds that such a normal right of sovereign independence is not prohibited under international law norms (Hyde and Wehle 1933). Furthermore, even though trade policy deployment against all other countries is a matter of national sovereignty, whether a trade policy targeting a specific country is in line with international law norms is still debatable. The US agrees on the legitimacy of such policies based on cases. For example, in Banco National de Cuba v. Sabbatino (1962), the US court argued that no doctrine of international law could be invoked to urge a country to import goods from an unfriendly power, justifying the US in taking trade control. Thus, the US had the right to permit a reduction of the sugar quota for Cuba to counter forced expropriation of property or enterprises. However, opponents may argue that trade control against targeted states might fall short of being justified. Mussolini denied the legitimacy of boycotts and viewed such measures as an act of war justifying military reprisal (Doxey 1971). Thomas Biersteker categorized economic sanctions into five groups: comprehensive sanctions, moderately discriminating measures, relatively discriminating measures and most targeted measures, in which most WTO-inconsistent sanctions were comprehensive sanctions, for example, a comprehensive trade embargo (Biersteker 2016).

2.3 Trade Control: Legality Under WTO Rules For the WTO, the principal concern is sanction overreach. Whether trade control as a method of economic sanctions is WTO consistent remains a contested issue in international law. To some extent, the WTO requests that member states bring their economic sanctions into conformity with their obligations under the WTO Agreement. There are justifiable economic sanctions that are preceded by a clear multilateral determination put forward by international organs that the targeted country is a violator of international laws and regulations and that cooperative approaches for addressing the situation have been exhausted, a point made by the author. For example, WTO member states collectively negotiate a set of trade policy rules; thus, trade control would not be imposed upon targeted countries until the WTO has issued a multilateral judgment that a violation of rules has occurred. Additionally, the determination of whether a state abuses civil human rights shall be made by the UN Security Council. In 2000, the International Labor Organization (2000) invoked Article 33 of its constitution to allow members collectively to authorize or encourage compliance measures against Burma by other members in response to labor rights abuses (Trebilcock and Howse 2005). In response, the US adopted the Burmese Freedom

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and Democracy Act (2003), which banned all trade with Burma, and received little international or even WTO (2004) criticism for this trade embargo. In the following part, the possibility of justifying trade restrictive measures under the general exception and the security exception is discussed, given that they are the most relevant GATT instruments for the Anti-foreign Sanctions Law of the People’s Republic of China (Anti-foreign Sanctions Law). In the analysis of the general exception, the article will focus on the ability of a variety of trade restrictive measures to meet the public morals exception.

3 Potential Justification for Trade Control: Public Morals Exception Having discussed the legality of trade control under international law norms and WTO rules, the remaining question is invoking GATT exceptions for the potential justification of trade control. In other words, trade control might be WTO inconsistent and thus require justification under the available exceptions. To invoke Article XX of GATT 1994, the targeting country should comply with the following two-tier analysis: (i) first, substantive requirements to determine the specific Article exception invoked; (ii) second, procedural requirements to guarantee all trade measures meet three elements that such restrictive measure is not a means of unjustifiable discrimination, or a means of arbitrary discrimination, or a disguised restriction on international trade.1

For example, in United States—Standards for Reformulated and Conventional Gasoline (1996), the Panel, regarding the sequence of steps, first analyzed the terms of Article XX(g) of GATT 1994 and then examined the measures at issue under the chapeau of Article XX.

3.1 Substantive Requirements This part aims to examine the first half of the two-tier analysis to justify trade control under the public morals exception. In 2003, the US empowered the president to ban the importation of any product of Burma that was related to the practice of forced, compulsory, or slave labor (Burmese Freedom and Democracy Act 2003). The US government imposed an outright ban on US imports of items until Burma demonstrated respect for the basic human and labor rights of its citizens. Additionally, the recent wave of US economic sanctions against China was imposed on the grounds of labor standards and human rights. H&M 1

Appellate Body Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products, WTO Doc. WT/DS58/AB/R (adopted Oct. 12, 1998).

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Group (2021), for instance, released a statement on due diligence and imposed trade control against Xinjiang Uyghur Autonomous Region based on accusations of forced labor and discrimination against ethnoreligious minorities. In its statement, H&M Group invoked the UN Guiding Principle on Business and Human Rights and OECD Guidelines for responsible business conduct to justify its import ban on goods from Xinjiang. In this regard, it is interesting to ponder whether labor is an element of public morality, whether the linkage of trade control to labor standards is justified, and whether the process and production method can be regarded as a labor standard. Is labor an element of public morality? ‘Public morals’ has been interpreted broadly: ‘The content of public morals should extend to universal human rights in many post-war societies and at the international level. Meanwhile, the very idea of public morality has become inseparable from the concern for human personhood, dignity, and capacity reflected in fundamental rights’ (Trebilcock and Howse 2005). Since core labor standards have been characterized as human rights in accordance with the United Nations Universal Declaration of Human Rights, the public morals exception clause can be invoked in the case of labor standards. Since labor can be regarded as an element of public morality, is the linkage of trade control to labor standards justified? There is disagreement on this subject in the context of international law. Some experts have claimed that a linkage between trade policy and such labor standards is not only defensible but arguably imperative. Trebilcock and Howse (2005) argued that there is little reason to support the argument that low-cost and low-skilled labor may result in unfair competition or a race to the bottom, while the linkage between trade control and core labor standards that reflect human rights is a cogent one. Low labor standards in exporting countries may undermine higher labor standards in importing countries and precipitate a low-level equilibrium trap (Alben 2001). However, some experts remain skeptical about the linkage of trade control to labor standards. They have argued that the rationale for linking economic sanctions with labor standards is largely incoherent. Economic theory suggests that the immediate imposition of common international labor standards across the board, based on developed country standards, would substantially reduce total economic welfare as conventionally measured in importing countries, exporting countries, and globally (Brown et al. 1996). In addition, can PPM be regarded as a labor standard and therefore as a reason to invoke the public morals exception to restrict trade? In accordance with WTO jurisprudence, it should be borne in mind that trade control is not related to process and production method. In the United States—Restrictions on the Imports of Tuna (1993), the WTO Panel denied ‘process and production method’ as a justification for trade control. In this case (1994), the US prohibited the imports of tuna that had been harvested in a way that harmed dolphins, but the Panel observed that policy changes in the exporting countries, rather than a simple trade embargo, could further the US conservation objectives. In light of this, Western countries may not invoke ‘process and production method’ to evade the illegality of trade control against cotton products in Xinjiang. If the US and its allies arbitrarily restrict the import of Xinjiang products on the grounds that the process and production method violate labor standards and

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human rights, this restriction may provide a broader excuse for trade protectionism. To reiterate this point, it should be noted that there is no evidence that cotton in Xinjiang is processed or produced by forced labor, and even if evidence did exist, the targeting countries should prove that all cotton products are processed and produced in this forced way.

3.2 Procedural Requirements We now turn to the second half of the two-tier analysis, analyzing the measures imposed under the chapeau of Article XX, which controls the exercise and prohibits the abusive exercise of a state’s rights2 with the aim of preventing the abuse of the exceptions. Article XX of the GATT 1994 is in fact an expression of the principle of good faith and addresses the manner in which trade control is applied.3 To determine whether the measure at issue is within the scope of measures permitted under the chapeau of Article XX of GATT 1994, the relevant part of this article reads as follows: ‘subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures.’ A WTO member whose nationals are targeted by economic sanctions may employ the following three reasonings to argue a breach of WTO rules: first, ‘unjustifiable discrimination’; second, ‘arbitrary discrimination’; and third, ‘disguised restriction’. In other words, to determine the application of the chapeau of Article XX, the GATT 1994 established the following three criteria: (i) that the restrictive measure is not a means of unjustifiable discrimination, (ii) that the restrictive measure is not a means of arbitrary discrimination, and (iii) that the restrictive measure is not a disguised restriction on international trade. To qualify as ‘unjustifiable discrimination’, three elements must exist. First, the application of the measure must result in discrimination; second, the discrimination must be unjustifiable in character; and third, the discrimination must occur between countries where the same conditions prevail.4 In accordance with WTO jurisprudence, the Panel specified the obligations of targeting states in avoiding ‘unjustifiable discrimination’, namely, comprehensive negotiations in good faith with all interested parties before a unilaterally designed

2

Appellate Body Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products, WTO Doc. WT/DS58/AB/R (adopted Oct. 12, 1998), para. 14. 3 Appellate Body Report, United States-Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, para. 115. 4 Appellate Body Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/AB/RW (adopted Nov. 21, 2001).

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import prohibition5 ; taking into account the particular situation of each targeted country6 ; no alternative reasonable course of action7 ; and flexibility in applying the guidelines.8 Considering the second element, ‘arbitrary discrimination’, three elements must exist. First, the application of the measure must result in discrimination; second, the discrimination must be arbitrary in character; and third, this discrimination must occur between countries where the same conditions prevail.9 In United States—Import Prohibition of Certain Shrimp and Shrimp Products, the Panel introduced a framework to analyze the second element, ‘arbitrary discrimination’, and claimed that the US had committed ‘arbitrary discrimination’. It was not acceptable for the US to impose an economic embargo and to require other WTO member states to adopt essentially the same comprehensive regulatory program, which was rigid and inflexible, without negotiations to achieve a certain policy goal without taking into account different conditions that may have existed in the territories of those other WTO members.10 In this case, the Appellate Body found that the US sea turtle conservation certification process was neither transparent nor predictable since there was no formal opportunity for exporting countries to be heard or to respond with arguments against it.11 Instead, regulatory programs, to be comparable in effectiveness, would address the lack of flexibility in line with the chapeau of Article XX.12 That is, it is unjustifiable for a state with stringent regulatory rules to impose trade restrictions on states with weaker standards. In short, any of the following elements may constitute ‘arbitrary discrimination’: (i) a lack of flexibility in applying the guidelines13 and 5

Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/RW (adopted June 15, 2001), paras. 5.66–5.67. 6 Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/RW (adopted June 15, 2001), para. 5.69. 7 Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/RW (adopted June 15, 2001), para. 3.84. 8 Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/RW (adopted June 15, 2001), para. 3.169. 9 Appellate Body Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/AB/RW (adopted Nov. 21, 2001). 10 Appellate Body Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/AB/RW (adopted Nov. 21, 2001), para. 164. 11 Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/RW (adopted June 15, 2001), para. 3.179. 12 Appellate Body Report, United States-Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/AB/RW (adopted Nov. 21, 2001), para. 141. 13 Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/RW (adopted June 15, 2001), para. 3.169.

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(ii) a lack of transparency and due process for exporting WTO members.14 One point requires further clarification of whether the motivation underlying the trade policy is strict regulation or trade protectionism under the framework of the WTO. As the WTO has not directly devised a means to capture the concept of ‘disguised restriction’ and to address the issue of what kind of measures constitute this concept, scholars have put forward their views. Since domestic trade policies make dual use of trade restrictions and domestic policy objectives, the targeting states may appear to be imposing a domestic trade policy with higher standards while actually imposing disguised trade restrictions on the targeted states. At the most general level, ‘disguised restriction’ can be deemed restrictive measures that are concealed or unannounced (Du 2015) and for which the motivation is uncertain. Moreover, I develop an argument that the concept of ‘disguised restriction’ may invoke the concept of ‘disguised protectionism’ put forward by Moonhawk Kim. As Moonhawk Kim noted, ‘disguised protectionism’ is state regulations that purposefully restrict international trade while appearing to be acceptable domestic policies. It is constituted when other states are uncertain about a state’s motivation, for example, whether the trade policy in question serves genuine domestic regulatory objectives or merely protects particular domestic industries (Kim 2012).

4 Potential Justification for Trade Control: Security Exception Beyond the public morals exception of the GATT 1994, the issue that requires further discussion is the boundaries of the national security exception, a double-edged sword deployed to justify trade control. Is the national security exception of the GATT 1994 well equipped to prevent it from being used as a pretext for trade protectionism, and is the identification of ‘national security’ beyond the WTO’s reach? The security exception of Article XXI(b)(iii) of the GATT 1994 reads as follows: ‘Nothing in this Agreement shall be construed: […]. (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interest […]. (iii) taken in time of war or other emergency in international relations […].

Since this exception degenerated into a catchall screen to disguise political and economic skirmishes between member states, as Richard Sutherland Whitt noted (Whitt 1987), it is essential in this section to pursue the state practice of invoking the security exception clause, the question of jurisdiction, and further discussion of the elements of invocation. 14

Panel Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products Recourse to Article 21.5 DSU by Malaysia, WTO Doc. WT/DS58/RW (adopted June 15, 2001), para. 3.169.

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In accordance with Article XXI(b)(iii), the contracting party may act as it considers necessary for the protection of its essential security interest taken in time of war or other emergency in international relations. In Russia—Traffic Transit, the WTO Panel put forward objective and subjective elements of the security exception clause. The prerequisite ‘taken in time of war or other emergency in international relations’ is an objective element, and the subjective elements are ‘necessary for the protection’ and ‘essential security interest’.

4.1 Other Emergency in International Relations The prerequisite ‘taken in time of war or other emergency in international relations’ requires objective factual circumstances of war or other emergency in international relations, chronological concurrence between trade restrictive measures and such events, and geographical proximity to the targeting state. In accordance with the WTO Panel Report, ‘war’ refers to armed conflicts occurring between states, between governmental forces and private armed groups, or between such groups within the same state.15 Since the confines of ‘emergency in international relations’ are not as clear as those of ‘war’, what types of action can be deemed ‘emergency in international relations’? First, the objective existence of emergency in international relations must be confirmed. The Shorter Oxford English Dictionary definition of ‘emergency’ includes a ‘situation, esp. of danger or conflict, that arises unexpectedly and requires urgent action’ and a ‘pressing need… a condition or danger or disaster throughout a region’ (Languages 2007). In Black’s Law Dictionary, ‘international relations’ is defined generally to mean ‘world politics’ or ‘global political interaction, primarily among sovereign states’ (Garner 2004). In Russia—Measures Concerning Traffic in Transit, the Panel suggested that political or economic conflicts between states are not sufficient to constitute ‘emergency in international relations’ because ‘other emergency in international relations’ is in conjunction with ‘war’, unless these ‘emergencies in international relations’ give rise to defense and military interests or maintenance of law and public order interests.16 The Panel further noted that ‘emergency in international relations’ appears to refer to a situation of armed conflict, of latent armed conflict, of heightened tension or crisis, or of general instability engulfing or

15

Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), para. 7.72. 16 Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), paras. 7.74, 7.75. An “emergency in international relations” must be understood as eliciting the same type of interests, all defense and military interests and law and public order interests, as those arising from the other matters addressed in the enumerated subparagraphs of Article XXI(b). Additionally, political or economic conflicts With other Members or states are not sufficient, of themselves, to constitute an emergency in international relations, unless they give rise to defence and military interests, or maintenance of law and public order interests.

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surrounding a state.17 Contrary to ‘emergency in international relations’ in Article XXI of GATT 1994, the existence of ‘other emergency in international relations’ in the TRIPS Agreement may be based on a political crisis between WTO members. In Saudi Arabia—Measures Concerning the Protection of Intellectual Property Rights, the existence of ‘other emergency in international relations’ was established based on the combination of Saudi Arabia’s comprehensive measures putting an end to all economic and trade relations and the severance of all diplomatic and consular relations.18 In light of this, since Ukrainian President Volodymyr Zelensky severed diplomatic relations with Russia after it launched military operations in Donbass on February 24 (Xinhua 2022), which established the objective existence of emergency in international relations, this military conflict enabled both states to invoke the national security exception to defend their trade restrictive measures. Second, since the prerequisite requires chronological concurrence between trade restrictive measures and such events, preventive trade restrictive measures cannot be justified based only on a future emergency in this regard. The action of a member state must be taken during an emergency in international relations.19 Moreover, the emergency must occur in geographical proximity to the targeting state. Unilateral sanctions that are implemented to address grave human rights violations occurring in geographical proximity to a WTO member state and that could potentially trigger other negative externalities, such as refugee flows and cyberattacks on critical infrastructure, that may have a devastating effect on the exercise of state functions can be acknowledged to constitute ‘other emergency in international relations’, as Bogdanova (2021) noted. The foregoing discussion implies that the US trade control imposed to prevent and punish so-called forced labor in Xinjiang cannot be justified under the security exception for three reasons. First, the United Sates cannot demonstrate that the socalled forced labor will cause heightened tension or crisis or general instability for the United States. Second, the United States cannot demonstrate that the heightened tension caused by Xinjiang forced labor will infringe on its defense or military interests or the maintenance of its law and public order interests. Third, even if human rights violations are occurring in Xinjiang, they are not occurring in geographical proximity to the United States.

17

Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), para. 7.76. 18 Panel Report, Saudi Arabia—Measures Concerning the Protection of Intellectual Property Rights, WTO Doc. WT/DS567/R (adopted June 16, 2020), paras. 7.257–7.259. 19 Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), para. 7.70.

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4.2 Essential Security Interests The question of the jurisdiction to evaluate essential security interests under the security exception of the GATT 1994 has received much attention from legal scholars and governments, which raises the troubling question of whether the interpretation is self-judging and what international body can create a binding definitive interpretation of the security interests for interested states. Despite the vague definition of ‘essential security interests’, the WTO Penal Report contained an official interpretation for the first time in Russia—Measures Concerning Traffic in Transit in April 2019, answering the key question of the security exception. While ‘essential security interests’ should be interpreted in such a way as to allow members to identify their own security interests and their desired level of protection, the Panel should, on the basis of the reasons provided by the invoking member, review whether the interests at stake can reasonably be considered essential security interests and whether the action in question is capable of protecting security interests from threats in good faith.20 That is, essential security interests are at states’ discretion under the oversight of the WTO. Even though a WTO member state can determine its own essential security interests, these interests should be articulated sufficiently to demonstrate their veracity in good faith. Before the WTO Panel Report, reactions to the jurisdiction of WTO members were mixed. In most members’ and scholars’ view, states themselves have jurisdiction to evaluate measures taken in accordance with Article XXI of the GATT 1994. In other words, the subjective assessment cannot be denied by other international institutions, including the WTO, International Court and others. In several WTO Panel Reports wherein the invocation of the national security exception clause was discussed, states such as Russia, the United States, Japan and Ghana conceded that member states possess jurisdiction to evaluate trade measures under the national security exception. Russia, in Russia—Measures Concerning Traffic in Transit, asserted that under Article XXI(b)(iii), the determination of a member’s essential security interests is at the sole discretion of the member invoking the provision in light of the fact that the issues extend beyond the scope of trade and economic relations.21 More specifically, the WTO is not in a position to determine the essential security interests of a member, what actions are necessary to protect those essential security interests, disclosure of what information may be contrary to the essential security interests of a member, what constitutes an emergency in international relations, and whether such an emergency exists in a particular case because such determinations would result in interference in the internal and external affairs of a sovereign state.22 The US, in a WTO dispute related to the Cuban Liberty and Democratic Solidarity 20

Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), para. 7.43. 21 Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), paras. 7.27,7.28. 22 Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), paras. 7.28,7.29.

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Act (Helms-Burton Act), asserted that the Helms-Burton Act was enacted for national security and foreign policy goals, which are outside the GATT jurisdiction, and thus argued that it could unilaterally invoke security exceptions of the GATT and the GATS without interference from the WTO dispute settlement panel. Additionally, a member of the GATT stated that every country must be the judge in the last resort on questions relating to its own security. Last but not least, Japan noted that the WTO Panel interpretation could impair a member state’s decision to adopt measures necessary to protect its national security.23 At the same time, some states expressed dissatisfaction with the use of the security exception as a pretext for trade control. For instance, Ukraine, in Russia—Measures Concerning Traffic in Transit, argued that if the WTO Panel has no jurisdiction to examine and make findings under this clause, then in a dispute involving a measure that is WTO inconsistent, the invoking member, rather than the Panel, would decide the outcome of the dispute.24

4.3 Necessary for the Protection Whether the trade restrictive measures are necessary for the protection of essential security interests should be determined on the grounds of the principle of good faith,25 although in comparison with the other two elements, the Panel’s review of ‘necessary for the protection’ lacks objective criteria. In the EC—Asbestos case and Offshore Gambling case, the Panel interpreted ‘necessary’ as reasonably available. If reasonably available alternatives in line with WTO agreements exist, then the targeting states must justify their reasons for not choosing alternatives. In another case, Russia—Measures Concerning Traffic in Transit, Austria suggested that there a sufficient nexus should exist between the action taken and the member’s essential security interests.26 The element ‘necessary’ requires a minimal degree of plausibility between trade restrictive measures and their ability to contribute to the protection of the declared security interests. In assessing necessity, third parties’ interests that may be affected by trade restrictive measures should be taken into account, as the European Union noted.27

23

Panel Report, Russia—Measures Concerning Traffic in Transit, (adopted Apr. 26, 2019), para. 7.45. 24 Panel Report, Russia—Measures Concerning Traffic in Transit, (adopted Apr. 26, 2019), para. 7.31. 25 WTO Panel Report, Russia—Traffic in Transit, supra n. 30. 26 Panel Report, Russia—Measures Concerning Traffic in Transit, (adopted Apr. 26, 2019), para. 7.36. 27 Panel Report, Russia—Measures Concerning Traffic in Transit, (adopted Apr. 26, 2019), para. 7.43.

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5 Anti-foreign Sanctions Law and Linkages to the WTO This section first briefly examines the context of anti-foreign sanctions law promulgated in China and then examines the possible violations of WTO rules and the possibility of justifying anti-foreign sanctions under the WTO exceptions, as mentioned earlier. Thus, the questions posed in this section are essential for understanding the overall functioning of the anti-foreign sanctions law of China.

5.1 Legal Practice of Anti-foreign Sanctions Discriminatory restrictive measures against Chinese individuals and organizations that interfere with China’s internal affairs and compromise China’s sovereignty, security, or development are becoming more frequent and destructive. Since 2020, foreign organizations have been imposing trade control against goods, particularly cotton, from Xinjiang Uyghur Autonomous Region. According to the organizations engaged in these discriminatory activities, the rationales behind such all-embracing restrictions are accusations of alleged forced labor and discrimination against ethnoreligious minorities. These events have been unfolding against the background of the US economic sanctions imposed on China. China has thus adopted necessary anti-foreign sanctions and issued stern warnings to any external forces, individuals or organizations, engaged in such activities to oppose hegemony and power politics. Following the economic blockage, trade embargo and other coercive measures imposed on China on human rights grounds, for example, the Standing Committee of the National People’s Congress promulgated the Anti-foreign Sanctions Law on June 10, 2021. The anti-foreign sanctions of China are implemented through two parallel regimes: countermeasures that target discriminatory restrictive measures imposed by foreign countries against any Chinese citizen or organization and countermeasures that target those who compromise China’s sovereignty, security, or development interests (Anti-foreign Sanctions Law 2021). Hence, organizations and individuals in or outside the territory of China (including foreign organizations and individuals) are all prohibited or restricted from carrying out relevant transactions, cooperation, and other activities with sanctioned individuals and organizations. Before this anti-foreign sanctions law was passed, other countermeasures included the adoption of a new Export Control Law, the creation of an unreliable entity list of foreign enterprises that would be subjected to additional scrutiny, and Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (Sutter 2020). Recently, China has applied the Anti-foreign Sanctions Law in several cases. In response to the illegal US sanctions imposed on four Chinese officials under the pretext of so-called human rights violations in Xinjiang in accordance with domestic law, the Ministry of Foreign Affairs, on December 21, 2021, imposed anti-foreign sanctions on Nadine Maenza, Nury Turkel, Anurima Bhargava and James Carr,

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leaders or members of the United States Commission on International Religious Freedom (UNCIRF). These sanctions denied their entry, froze all types of property owned by them in the territory of China and prohibited organizations and individuals in the territory of China from carrying out relevant transactions with them (Qiu 2021). In addition, in response to the US visa refusal imposed on Chinese officials on March 21, 2022, the Ministry of Foreign Affairs reciprocally refused to issue a visa to sanction US officials interfering with Chinese interests (Sui 2022).

5.2 Possible Violations of WTO Law It is important to keep in mind that the provisions of the Anti-foreign Sanctions Law, which has a broad ambit, might raise the possibility that export and import restrictions on the supply of goods and services are inconsistent with obligations under the GATT for two reasons. A WTO member with nationals or entities that are targeted for trade control may employ Article I and Article XI of the GATT 1994 to argue a breach of WTO laws. All-embracing restrictions on the importation or exportation of goods may constitute a violation of the most-favored-nation treatment obligation entrenched in Article I:1 (Bogdanova 2021). Additionally, Article XI prohibits the use of quantitative restrictions on imports from or exports to another member state unless one of several detailed exceptions applies.28 Article XI of the Anti-foreign Sanctions Law (2021) prohibits or restricts the export and import of products and services offered by sanctioned individuals and organizations from both China and sanctioned countries, as mentioned in Article IX and Article X, which might be inconsistent with the core principles of WTO law at first glance. Since imposing anti-foreign measures is a political decision, China’s anti-foreign sanctions may be WTO inconsistent because of imposing sanctions on some states but not others in a discretionary way that lacks transparency, even when individuals and organizations in a countermeasure list are targeted. On the surface, the anti-foreign sanctions clearly violate the GATT 1994. In response, the abovementioned possibility of justifying trade restrictive measures in anti-foreign sanctions laws under the national security exception of the GATT 1994 is discussed in the following section.

28

Article XI of the General Agreement on Tariffs and Trade provides that “No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.”

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5.3 Potential Justification for Anti-foreign Sanctions The Russia—Measures Concerning Traffic in Transit case established limited WTO oversight over unilateral trade control invoking the GATT national security exception clause. For China, this case provided guidance for its anti-foreign sanctions in accordance with Article XI(3) of the Anti-foreign Sanctions Law, which states that China prohibits or restricts sanctioned organizations and individuals in its territory from carrying out relevant transactions. In defense of the anti-foreign sanctions, China may cite Article XXI of the GATT, as discussed above, permitting it to impose trade control on another country that has violated its national security. Additionally, since the GATT national security exception clause could be deemed by certain member states to be a vehicle not only for national security but also for trade protectionism, two questions arise: Do trade controls regarded as anti-foreign sanctions constitute a national security exception? In addition, did China invoke the GATT national security exception to safeguard national security or to circumvent the jurisdiction of the WTO dispute settlement panel by claiming a breach of national security interests? First, the WTO Panel will review China’s invocation of the GATT national security exception, since the Panel possesses inherent jurisdiction deriving from the adjudicative function.29 The Panel has jurisdiction to review China’s invocation of the national security clause instead of leaving it to self-judgment. In terms of China’s anti-foreign sanctions, the WTO Panel may find that the following measures are within its jurisdiction: China prohibits or restricts organizations and individuals in its territory from carrying out relevant targeted transactions. Thus, the next step is to determine whether China’s trade restrictive measures are covered by GATT Article XXI(b)(iii). Second, the possibility of justifying anti-foreign sanctions invoking the security exception clause of the GATT 1994 is significantly constrained by the objective prerequisite ‘taken in time of war or other emergency in international relations’. As discussed before, ‘emergency in international relations’, which is determined by the WTO Panel, is defined as a situation of armed conflict, latent armed conflict, heightened tension or crisis, or general instability engulfing or surrounding a state.30 Accordingly, in response to recent US discriminatory restrictive measures against Xinjiang, China may identify the situation as an emergency in international relations by reference to the following factors: (a) that it interferes with China’s internal affairs and (b) that it has resulted in other countries or regions, such as the EU, imposing sanctions against China. Based on this reasoning, the situation in which China imposes corresponding anti-foreign sanctions is likely to be clearly identified as an emergency in international relations. Third, does China’s corresponding trade control satisfy the conditions of the chapeau of Article XXI(b) of the GATT 1994? ‘Essential security interests’, evidently 29

Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), para. 7.53. 30 Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), para. 7.111.

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a narrower concept than ‘security interests’, may refer to quintessential functions of the state, namely, the protection of its territory and its population from external threats and the maintenance of law and public order internally.31 In light of the fact that the specific interests that are considered relevant to protection from external threats depend on the particular situation of each member state, China may define its own essential security interests in good faith and demonstrate the veracity of this definition. The main purpose of the Anti-foreign Sanctions Law is to ‘maintain national sovereignty, security, and development interests’ promulgated explicitly in Article I. In addition, in Article II of the National Security Law of the People’s Republic of China (National Security Law) issued in 2015, ‘national security’ refers to a status in which the regime, sovereignty, unity, territorial integrity, welfare of the people, sustainable economic and social development, and other major interests of the state are not faced with any danger internally or externally and the state has the capability to maintain a sustained security status. While China has not directly defined the term ‘essential security interests’, the ‘security interests’ defined in the National Security Law are not expanded too broadly, which could offer guidance for the definition. However, it is worth noting that the definition of ‘national security’ involves national economic interests that are not included in the ‘essential security interests’ defined by the WTO Panel. Thus, China must exercise restraint in invoking the GATT national security exception, separating emergency in international relations from mere economic and trade disputes.

5.4 Toward a Better WTO-Consistent Anti-foreign Sanctions Regime As a result, now, more than ever, a more stringent set of anti-foreign sanctions is vital to the interests of China and should be pursued as follows. A first step is to create a WTO consistency review regime. From the perspective of implementing countermeasures, the subject implementing these measures in China is the administrative organ, not the judicial organ, and the administrative organ does not exercise due processes such as judicial review, which virtually expands the scope of application of countermeasures. The WTO consistency review regime is a multilateral means of reducing the deleterious effects of foreign extraterritorial legislation. Such a regime should be permitted to examine what is necessary to conform with the public morals exception and national security exception of the GATT and preserve the legitimacy of these anti-foreign sanctions before they are imposed on targeted individuals or organizations. Second, adding to the legality of the GATT exception invocation, the consultation and conciliation mechanism is a key reform to allow China’s government to negotiate with targeted states to find alternative avenues for addressing concerns. The security 31

Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 26, 2019), para. 7.130.

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exception requires information to the fullest extent possible about trade measures imposed under Article XXI of the GATT 1994, as interpreted by the 1982 Ministerial Meeting (McGovern 1986). Furthermore, bilateral agreements in consideration of the principle of comity are a means of circumventing jurisdictional disputes. Third, the transparency of the sanction list should be enhanced. Given that the application of unilateral sanctions is a political decision and the determination of who will be targeted by such restrictions is influenced by many considerations, including political ones (Bogdanova 2021), targeted individuals or organizations should be granted a formal opportunity to be heard or to respond to the sanctions against them on the basis of fairness and due process, thus strengthening the stability and certainty of the sanction list. The officiating department may notify the government of each nation in writing through diplomatic channels. Fourth, the nature of anti-foreign sanctions is predictable. In response to discriminatory restrictive measures, China prohibits or restricts transactions with the targeted individuals or organizations. At the time of previous transactions, the interested parties could not have known that China would subsequently attempt to impose antiforeign sanctions with extraterritorial effects to prevent discriminatory restrictions. Thus, retrospective legislation should be abandoned. Fifth, special attention should be paid to civil society boycotts. Technically, a civil society boycott is not within the scope of unilateral economic sanctions because such sanctions are imposed by a state or an international body instead of an individual or a civil society group. However, there is a real likelihood that a spontaneous civil society boycott could become the impetus for a state to impose unilateral economic sanctions (Wang 2020), which poses new challenges for the targeted states. For example, in a recent case, the suppliers that H&M Group worked with will not source cotton from Xinjiang based on the fact that Better Cotton Initiative (BCI), a civil society organization, suspended BCI licensing of cotton from Xinjiang. Attributing restrictive measures imposed by nonstate actors to a WTO member is extremely difficult owing to legal standards of attribution embedded in the rules of state responsibility (Macak 2016). However, the implications of these restrictive measures imposed by civil society organizations are far-reaching. To address this concern, the Chinese government might also review these restrictive measures, a forewarning of possible economic sanctions, in advance. Sixth, the Anti-foreign Sanctions Law may contain notification obligations targeting foreign discriminatory restrictive measures. The two main rationales for notification requirements are that they deter prudential compliance with foreign extraterritorial measures and keep governments informed of the extent to which sanctions are being enforced (Senz and Charlesworth 2001). With respect to the notification obligation, the law requires Chinese individuals and organizations to forthwith give notice to the administrative departments that they are experiencing discriminatory restrictive measures. The term ‘discriminatory restrictive measures’ is broadly defined to cover unilateral economic sanctions. Thus, in response to the challenges faced by the Anti-foreign Sanctions Law, a stringent set of anti-foreign sanctions capable of coping with the WTO legitimacy issue is proposed for China in the context of global governance.

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6 Concluding Remarks This article makes three main points. First, the legality of economic sanctions, especially trade control, is still controversial in the context of international law norms and WTO rules. Certain unilateral acts of trade control by a WTO member state may be WTO inconsistent. Second, the availability of the public morals exception and national security exception offers WTO member states potential justification for trade control in light of the fact that free trade and national interest protection are not conflicting goals but are complementary and mutually reinforcing. Third, as China imposes trade control as an anti-foreign sanctions measure, anti-foreign sanctions regime reform is an inevitable path to design better ways to follow WTO rules. It stands to reason, in any event, that the reform of the WTO mechanism reflects the further development of global governance. In other words, WTO reform is an inevitable path for global governance reform, as it is subject to the national interests and foreign policy purposes of leading countries. The issue of whether the imposition of trade control is permissible under the public morals exception and national security exception will become the main bone of contention. To combat current US discriminatory restrictive measures against Chinese individuals and organizations under the pretext of objecting to forced labor, China may follow six steps to rethink and issue a more stringent set of anti-foreign sanctions, ranging from top-level design to specific article amendments. In summary, an anti-foreign sanctions regime with Chinese characteristics presents practical and legal implications of great magnitude to safeguard the international rule of law, build win–win international relations, and provide a new theoretical weapon for China to respond to the interference of other countries.

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